CAT / FIA FFA Syllabus D. Recording Transactions And Events - Alternative methods of valuing - Notes 3 / 10
The alternative methods of valuing inventory
The inventories figure is made up of two elements
Quantity
The quantity of inventories held at the year end is established by means of a physical count of inventory in an annual counting exercise, or by a 'continuous' inventory count.
Valuation
The basic rule as per IAS 2 “Inventories” states that:
Inventories should be measured at the lower of cost and net realisable value
The value of inventories is calculated at the lower of cost and net realisable value for each separate item or group of items.Here, the prudence concept is being applied in presenting financial information.
Other methods
There are other methods which, in theory, might be used for the valuation of inventory
Inventories might be valued at their expected selling price.
Inventories might be valued at their expected selling price, less any costs still to be incurred in getting them ready for sale and then selling them. This amount is referred to as the net realisable value (NRV) of the inventories.
Inventories might be valued at their historical cost (ie the cost at which they were originally bought).
Inventories might be valued at the amount it would cost to replace them. This amount is referred to as the current replacement cost of inventories