Inventory valuation

Question 1

What is inventory

Answer 1

Inventory is the stock of goods produced or bought for resale, but not yet sold.

Question 2

How is inventory valued?

Answer 2

inventory is valued at the lower of cost and net realizable value (NRV).

Question 3

What is the “cost” of inventory?

Answer 3

Cost includes the purchase price plus all costs associated with getting the inventory ready for sale (e.g., freight, customs duties).

Question 4

Net Realizable Value (NRV)

Answer 4

NRV is the estimated selling price minus the costs to sell the inventory (e.g., repairs, packaging)

Question 5

Explain with an example how to determine the lower of cost and NRV.

Answer 5

Let’s say an inventory costs
1300 (includingfreightandduties) and its NRV is 1100. The inventory is recorded at $1100 (the lower value)

Question 6

Why use the lower of cost and NRV?

Answer 6

The principle of prudence dictates that anticipated losses should be recorded, while gains are only recorded when realized. This prevents overstating assets and profits.

Question 7

How to value inventory with multiple products?

Answer 7

Value each product individually using the lower of cost and NRV, then sum the values

Question 8

Is there a specific account for inventory?

Answer 8

Generally, there isn’t a specific account for inventory. The closing inventory is determined through physical stocktaking.

Question 9

Explain FIFO (First-In, First-Out).

Answer 9

The oldest inventory is sold first.

Question 10

Explain LIFO (Last-In, First-Out).

Answer 10

The newest inventory is sold first. LIFO is generally not used anymore.

Question 11

Explain AVCO (Average Cost).

Answer 11

The average cost of all inventory is used