Summary
Inventory refers to goods held by a business for resale or use in production and is a current asset on the financial statement. Inventory must be valued at the lower of cost and net realisable value (NRV) to ensure accurate financial reporting.
- Inventory — goods held for resale or production. Example: Raw materials, work in progress, finished goods.
- Cost — includes purchase price and additional expenses to bring inventory to its current state. Example: Purchase price, carriage inwards, import duties.
- Net Realisable Value (NRV) — estimated selling price minus costs to complete and sell. Example: Selling price 8, NRV = $87.
- Prudence Principle — ensures assets and income are not overstated. Example: Valuing inventory at NRV if it is lower than cost.
Exam Tips
Key Definitions to Remember
- Inventory: Goods held for resale or production.
- Cost: Purchase price plus additional expenses.
- Net Realisable Value (NRV): Selling price minus costs to complete and sell.
Common Confusions
- Confusing cost with selling price.
- Including selling costs in inventory cost.
Typical Exam Questions
- What is included in the cost of inventory? Purchase price, carriage inwards, import duties.
- Why is inventory valued at the lower of cost and NRV? To avoid overstating assets and income.
- How do you calculate NRV? NRV = Selling Price - Costs to Complete - Costs to Sell.
What Examiners Usually Test
- Understanding of cost and NRV components.
- Application of the prudence principle in valuation.
- Ability to calculate and compare cost and NRV.