How to Measure Inventory?

Two types of Journal Entries:

- According to IAS 2, paragraph 9, inventories Direct Method:
shall be measured at the lower of cost and
net realizable value (LCNRV). Inventory, end xxx
Profit and Loss Summary xxx
LCNRV
- Accountants shall apply the principle of FS Presentation:
conservatism in the measurement of Inventory xxx
inventories.
- An asset shall not be measured and
reported at an amount higher than Allowance Method:
what is likely to be realized from sale
or use. Inventory, end xxx
- Conservatism: an accountant shall Profit and Loss Summary xxx
lean towards the less favorable
outcome for an entity. Loss on inventory writedown xxx
- Reasons why Selling Prices are lower than Allowance for inventory writedown xxx
its Cost or
- Inventories are damaged. Allowance for inventory writedown xxx
- Inventories have become wholly or Gain on reversal of inventory writedown xxx
partially obsolete.
- The selling price has declined. Note: Gain can only gain in the subsequent years
- Estimated cost of completion/cost of after you record the allowances. It may result from
disposal has increased. the mark-up of the NRV of the inventory.

What is NRV for inventories? FS Presentation:

- Net realizable value is the difference Inventory, at cost xxx
between the estimated selling price for all Less: Allowance for inventory writedown xxx
inventories and the cost of storing or Net Realizable Value xxx
preparing the goods for sale.
- For example, a retailer purchases Presentation:
large pieces of expensive furniture Inventory, beg xxx
as inventory, and the company has Net Purchases xxx
to build a display case and hire a TGAS xxx
contractor to carefully move the Inventory, end xxx
furniture to the buyer’s home. These COGS, before writedown xxx
extra costs are subtracted from the Less: Loss on Inventory writedown xxx
selling price to compute the NRV. COGS, after writedown xxx

Inventory Writedown
- Cost < NRV = measure inventory at cost.
- Cost > NRV = measure inventory at NRV
with recognition of the decrease in inventory
value.
- Inventories shall be measured at LCNRV
applied by individual items.