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- This topic has 5 replies, 2 voices, and was last updated 4 years ago by John Moffat.
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- January 5, 2020 at 2:44 am #556848
Why inventory should be valued at lower of cost or net realisable value ?
January 5, 2020 at 9:26 am #556853Because 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.
January 5, 2020 at 1:10 pm #556862Sry I didn’t get you
How lower of cost & nrv have connection with losses and profitJanuary 5, 2020 at 2:55 pm #556866If 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.
January 5, 2020 at 3:11 pm #556870Thanks sir! Got it
January 6, 2020 at 7:29 am #556891You are welcome 🙂
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