Inventory Valuation

Inventory should usually be valued at its cost price unless you are likely to receive less than that  - i.e. anticipating a loss – prudence then overrules the cost concept here.

Net Realisable Value (NRV) is how much you will get for an item(s) less any costs incurred in getting into a saleable condition.  Remember the definition "Inventory should be valued at the lowest of cost or Net Realisable Value"

• For example a TV bought for resale originally cost a firm £200.  It can be sold for £220 but only after £50 of repairs are made.  The item should therefore be valued in the overall inventory at (220-50) £170 as this is lower than the cost price of £200
•  Watch out for goods on ‘Sale or Return’.  These have not yet been confirmed as sold (realisation concept) – so they are still our inventory and are valued at cost price as a result (add this to your closing inventory) 

Key points to remember

Identify what the cost price is
Identify what the NRV is (this is selling price less any repair costs)
Value the stock at the lowest of the two.
If already included in the inventory you must deduct the difference
If not already included in the inventory you must add the NRV
 If the stock goes down by £10 then the profit goes down by £10 and vice versa!