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Types of industry and changes in the industry are the risks in inherent risk. In beginning it is recorded as purchases and in year end as inventory. inventory is valued as lower of cost or NRV. what would happen to fashion out clothes?
I guess it’s NRV would be lower as demand falls. how would clothes be recorded in financial statements?
All inventory has to be recorded at the lower of cost or NRV. For example:
1 Cost $100, normal selling price $180, discounted selling price because clothes are out of fashion $120: inventory would be valued at $100 ie its cost as that is lower than the NRV of $120.
2 Cost $100, normal selling price $180, discounted selling price because clothes are out of fashion $90: inventory would be valued at $90 ie its NRV as that is lower than the cost of $100.
sir, in fashion out clothes there is normally lower of NRV. so what would be the risk for those types of industries? I came across with the words ”overvaluation of inventory” .. but how?
The risk arises because it might not be realised that some clothes will sell only below cost. It can be relatively difficult to assess NRV – particularly for auditors who are not necessarily experts in certain types of inventory.
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