Question

Why is valuing inventory at net realizable value sometimes preferred?

1) To obtain the cost figures easily
2) To avoid difficulties in obtaining the cost figures
3) To ensure accurate valuation of inventory
4) To comply with accounting standards

Answer 1

Valuing inventory at net realizable value ensures accurate inventory valuation and complies with accounting standards such as GAAP and IFRS, preventing overstatement of inventory on the balance sheet.

Step-by-step explanation:

Valuing inventory at net realizable value is sometimes preferred in order to ensure accurate valuation of inventory. This method accounts for the estimated selling price in the ordinary course of business, and less reasonably predictable costs of completion, disposal, and transportation. It is preferred because it preempts the potential overstatement of inventory value and prevents future income statement losses if inventory were to be sold below cost. This valuation method is particularly useful when the selling price of inventory is less than the cost, which might happen due to damage, obsolescence, or market changes. Moreover, using net realizable value is consistent with certain accounting standards such as the lower of cost or net realizable value rule, which is a conservative approach to inventory valuation outlined in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Following this rule helps to ensure that inventory is not overstated on the balance sheet