INVENTORY VALUATION

Question 1

what does inventory valuation mean?

Answer 1

Before reporting inventory on the financial statements, it is important to check that it is properly valued

Question 2

reasons for why it happens

Answer 2

Sometimes the value falls due to changes in technology or style

Question 3

Lower of cost and net realizable value

Answer 3

• when the value of inventory is lower than cost, it is written down to that lower value
• This follows GAAP’s principle of conservatism

Question 4

The Lower of Cost or NRV rule is applied to items in inventory at the end of the accounting period. The four steps are followed:

Answer 4

1. Determine the cost of the items in ending inventory using the appropriate cost determination method (specific, FIFO, average)
2. Determine the net realizable value of the items in ending inventory
3. Compare values determined in steps 1 and 2
4. Use the lower value to report inventory on the balance sheet

Question 5

Net realizable value:

Answer 5

selling price less any costs to make the goods ready for sale