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Hi John,
Why do we need net realisable value when we value the closing inventory by using Avco and FIFO? Ley us assume that at the end of accounting period we value closing inventory bu ising FIFO should not we transfer it as a opening inventory in SFP.
After valuing Cl Inventory bu using FIFO or AVCO we are getting closing inventory at cost then do we need to compare it with Net Realisable value( expected selling price minus selling cost) to get the the real value of Closing Inventory?
I am so confused. Please, help me!!
We use FIFO or AVCO to calculate the cost of the inventory, and the accounting standard allows us to have a policy of using whichever of the two methods we prefer (but must stick with the same policy).
Separately the standard also says that we must value inventory at the lower of cost or net realisable value. So having calculated the cost (because on whichever policy the company is using), then if the NRV of the any of the inventory is lower than that cost (because, for example, some of the inventory is old or damaged) then we must value that part of the inventory at the NRV.
Have you watched my free lectures on the valuation of inventory where I explain these rules?
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