The Basis of the Valuation of Inventory (Cambridge (CIE) IGCSE Accounting)

Revision Note

Dan Finlay

Written by: Dan Finlay

Reviewed by: Lucy Kirkham

Cost & Net Realisable Value

What is the cost and net realisable value of inventory?

  • The cost of inventory is the total cost to the business of obtaining goods

    • The purchase cost of the goods

    • Plus the cost for carriage inwards

  • The net realisable value (NRV) of inventory is the net amount the business is likely to receive when selling the goods

    • The selling price of the inventory 

    • Minus any selling expenses

      • Such as the cost of repairing damaged goods

What is the basis for the valuation of inventory?

  • Inventory is valued at the lower value between:

    • The cost

    • The net realisable value

  • This method of valuation complies with the accounting principle of prudence

    • The value of the inventory (asset) is not overstated

    • The profit is not overstated

  • For most inventory, the cost will be the lower of these values; however, there are some exceptions

    • Damaged goods might need to be repaired before they can be sold

    • Goods that are close to their expiration date might need to be sold at a lower price

    • The business might use lower prices to promote new products

Worked Example

Chen purchased an item of inventory for $15 and paid an extra $3 for delivery charges.

Chen accidentally damages the item. If he spent $8, he could sell it for $24.

What is the value of the item of inventory?

Answer

  • Find the total cost of the item by adding the delivery charge to the purchase cost

    • $15 + $3 = $18

  • Find the net realisable value by subtracting the repair cost from the selling price

    • $24 - $8 = $16

Inventory is valued at the lower value between cost and net realisable value.

The inventory is valued at $16

Inventory Valuation Statements

What is an inventory valuation statement?

  • An inventory valuation statement shows the total valuation for the inventory of a business

  • These are useful when a business sells different types of goods

  • There is no fixed format, however, a table is normally used

  • The statement should show:

    • The name of each type of good

    • The cost of each item

    • The net realisable value of each item

    • The quantity of each type of goods

    • The total value of each type of goods

    • The overall value of the goods

Examiner Tips and Tricks

Use a table structure to make your workings clear to an examiner. This means that you might get follow-through marks if you make an arithmetic mistake but follow the correct process.

Worked Example

Mei is a trader who sells art supplies. Mei provides the following information about her inventory at 29 February 2024.

Item

Number of units

Cost per unit

$

Carriage inwards per unit

$

Selling price per unit

$

Selling expenses per unit

$

Paintbrushes

50

2

-

4

-

Packs of Paint

80

25

2

30

1

Easels

5

30

5

40

8

Calculate the value of the inventory at 29 February 2024.

Answer 

  • Find the total cost per unit by adding together the cost per unit and the carriage inwards per unit

  • Find the net realisable value per unit by subtracting the selling expenses per unit from the selling price per unit

  • Value each unit at the lower of the cost and the net realisable value

  • Multiply the value per unit by the number of units to find the total value for each item

  • Add together the total values for each item.

Item

Number of units

Cost

$

Net realisable value

$

Value per unit

$

Valuation

$

Paintbrushes

50

2

4

2

50 ✕ 2 = 100

Packs of Paint

80

25 + 2 = 27

30 - 1 = 29

27

80 ✕ 27 = 2 160

Easels

5

30 + 5 = 35

40 - 8 = 32

32

5✕ 32 = 160

Total

2 420

The total valuation of the inventory is $2 420.

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Dan Finlay

Author: Dan Finlay

Expertise: Maths Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.

Lucy Kirkham

Author: Lucy Kirkham

Expertise: Head of STEM

Lucy has been a passionate Maths teacher for over 12 years, teaching maths across the UK and abroad helping to engage, interest and develop confidence in the subject at all levels.Working as a Head of Department and then Director of Maths, Lucy has advised schools and academy trusts in both Scotland and the East Midlands, where her role was to support and coach teachers to improve Maths teaching for all.