Inventory Valuation

What inventory valuation covers

Inventory is measured at the lower of cost and net realisable value. Cost can be determined using first-in-first-out or a weighted average, and the choice changes both the closing balance and reported profit when prices are moving. Writing inventory down to net realisable value is required as soon as it is expected to sell for less than it cost.

These challenges cover FIFO and weighted average computations, cost of goods sold, and write-downs to net realisable value.

Where marks are usually lost

• Valuing at the higher of cost and net realisable value.
• Recalculating a weighted average only at period end when a perpetual system requires it after each purchase.
• Including selling costs in cost rather than deducting them when arriving at net realisable value.