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Because accounting standards state that we must recognise losses as soon as we identify them but only take profits when they are actually realised – that is what we are doing when we value at the lower of cost and NRV.
Sry I didn’t get you
How lower of cost & nrv have connection with losses and profitIf you have watched my lectures you will know that closing inventory appears in the Statement of Profit and Loss. Usually the NRV will be higher than cost and if we were to value at the NRV we would have higher inventory and therefore higher profit – we would be therefore taking the profit that we actually only make when the goods are sold. So we do not do that and we value at cost.
If the NRV is lower then cost then the goods will be sold at a loss. If we know this is going to happen then we vale the inventory at the NRV which means lower closing inventory and therefore lower profit – we are recognising the loss immediately.
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