Question

When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?

a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin

Answer 1

Step-by-step explanation:

The applicable accounting standard IAS 2 (Inventory) requires that inventory be carried at the lower of cost or net realizable value.

Initial recognition of inventory is at cost. In other words, where the cost is lower than the net realizable value, inventory is written down to the net realizable value.

As such, when inventory declines in value below original (historical) cost, and this decline is considered other than temporary, the maximum amount that the inventory can be valued at is the net realizable value.

The right option is b. Net realizable value