Valuation of inventory

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Cambridge IGCSE Accounting 0452

Valuation of Inventory

The big idea: Inventory is valued at the lower of what it cost and what it can be sold for, so that the business never shows a profit it has not made. Because closing inventory reduces cost of sales, any error in its value flows straight into gross profit, profit for the year, equity and current assets.

Summary — What This Chapter Covers

Inventory is valued at the lower of cost and net realisable value (NRV), item by item.
NRV = expected selling price − costs to complete or repair − costs of selling.
An inventory valuation statement adjusts a count made on a different date back to the year-end date.
Overstating closing inventory overstates gross profit, profit for the year, owner’s equity and current assets (and the opposite for understating).

1. Lower of Cost and Net Realisable Value

Syllabus 4.5 · Paper 1 & 2

Never value goods above what they will bring in

Rule Inventory value = lower of cost and net realisable value (for each item or group of items)
Net realisable value = selling price − costs to repair, complete or sell

Normally cost is lower and inventory stays at cost. When goods are damaged, out of date or out of fashion, their NRV can fall below cost; they are then written down to NRV. This applies the prudence principle: a loss is recognised as soon as it is expected, but an expected profit is not recognised until the goods are sold (realisation).

Worked example

A furniture shop has the following items at the year end. Calculate the value of inventory.

Item	Cost $	NRV $	Value used $
Model A tables (10)	1,200	1,500	1,200
Damaged Model B chair	800	650	650
Model C desks (4)	2,000	2,600	2,000
Out-of-date display unit	1,100	600	600
Inventory valuation	5,100		4,450

The damaged chair has NRV 900 − 250 = $650; the display unit 700 − 100 = $600. Each item is compared separately, not the totals.

Practice Question 1

A batch of jackets cost $3,600. Normally they would sell for $5,000, but they are now out of fashion. They can be sold for $3,400 if $200 is spent on advertising. At what value should they be included in inventory?

2. Inventory Valuation Statements

Syllabus 4.5 · Paper 1 & 2

Adjusting a count to the year-end date

Inventory is often counted a few days after the year end. The count must be adjusted to show what would have been there on the year-end date, at cost.

Movement between year end and count date	Adjustment to the count
Goods sold after the year end (they were there at the year end)	Add back, at cost (remove the profit from the selling price)
Goods received after the year end (not there at the year end)	Deduct, at cost
Goods returned by customers after the year end	Deduct, at cost
Goods returned to suppliers after the year end	Add back, at cost

Worked example

A business’s year ended 31 December 2025. Inventory was counted on 3 January 2026 at cost, $18,400. Between 1 and 3 January goods were sold for $1,500 (selling price includes a mark-up of 25% on cost) and goods costing $900 were received from suppliers. Prepare a statement to calculate the inventory at 31 December 2025.

	$
Inventory at cost on 3 January 2026	18,400
Add goods sold 1–3 January at cost (1,500 × 100/125)	1,200
	19,600
Less goods received 1–3 January	(900)
Inventory at 31 December 2025	18,700

Practice Question 2

Memorise

Valuation rule

NRV

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Valuation of inventory