Inventory Valuation: Cost vs Net Realizable Value Explained
What is the difference between reporting an inventory item at cost or net realizable value (NRV)?
How do recent increases in gasoline prices affect the reporting of different types of vehicles in a Chevrolet dealership's inventory?
Answer:
Vans, Trucks and SUVs will be reported at NRV while 2-door sedans, 4-door sedans and Sports cars will be reported at cost.
Inventory Quantity Lower of Cost and NRV per unit Total
Vans 3 $19,000 $57,000
Trucks 6 $15,800 $94,800
2-door sedans 2 $11,800 $23,600
4-door sedans 7 $15,800 $110,600
Sports cars 3 $31,000 $93,000
SUVs 5 $22,000 $110,000
Explanation:
IAS 2 Inventories states that inventory is to be recognized at cost, however, subsequent measurement requires that inventory be carried at the lower of cost or net realizable amount (NRV).
As such, where the cost of inventory is higher than the NRV, it is written down to the NRV using the following entries,
Debit Inventory write off/Cost of goods sold
Credit Inventory account
with the difference between the cost and the NRV.
Inventory Quantity unit Cost unit NRV
Vans 3 $21,000 $19,000
Trucks 6 $16,800 $15,800
2-door sedans 2 $11,800 $13,800
4-door sedans 7 $15,800 $18,800
Sports cars 3 $31,000 $34,000
SUVs 5 $27,600 $22,000