AS-L09 — Inventory Valuation
Understanding how inventory is valued and how inventory valuation affects profit and financial statements.
Learning Objectives
By the end of this lesson students should be able to:
• understand the meaning of inventory valuation
• apply the lower of cost and net realisable value rule
• calculate inventory value correctly
• understand the effect of inventory valuation on profit
• answer examination-style questions
Concept Framework
What is Inventory Valuation?
Inventory valuation is the process of determining the value of unsold goods held by a business at the end of an accounting period.
Lower of Cost and Net Realisable Value (NRV)
Inventory must be valued at:
Lower of:
• Cost
or
• Net Realisable Value (NRV)
This follows the principle of prudence.
CORE RULES
| Term | Meaning |
|---|---|
| Cost | Amount paid to purchase inventory |
| Net Realisable Value | Estimated selling price less selling expenses |
| Inventory Valuation Rule | Lower of cost and NRV |
TRANSACTION LOGIC
If NRV is lower than cost, inventory value must be reduced.
Overvaluing inventory causes:
• profit to be overstated
• assets to be overstated
Prudence prevents businesses from overstating profits and assets.
Worked Examples
Example 1 — Cost Lower Than NRVCost = £5,000
NRV = £5,400
Inventory Value = £5,000
Example 2 — NRV Lower Than CostCost = £7,200
NRV = £6,800
Inventory Value = £6,800
Example 3 — Calculating NRVSelling Price = £10,000
Selling Expenses = £600
NRV:
£10,000 − £600
= £9,400
📌 Additional questions are available in the 🎯 Lesson wise premium resources and Guess Question Papers section + YouTube Explanation section.Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define net realisable value
State the inventory valuation rule
Level 2 – Application Practice
Explain why inventory should not be valued above net realisable value.
Level 3 – Examination Style Question
Inventory cost = £8,500
Estimated selling price = £8,200
Selling expenses = £300Calculate the inventory value.
(3 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you calculate NRV correctly?
2. Can you apply the lower of cost and NRV rule?
3. Can you explain the prudence principle?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
NRV:
£8,200 − £300
= £7,900
Cost = £8,500
Inventory Value = Lower figure
= £7,900
How This Topic Appears in the Examination
This topic commonly appears as:
• inventory valuation calculations
• prudence principle questions
• income statement adjustments
Examiners assess:
• correct NRV calculations
• application of prudence
• accurate inventory valuation
Self-Assessment Checklist
I understand inventory valuation
I can calculate NRV correctly
I can apply the lower of cost and NRV rule
I understand the prudence principle
I can answer exam questions confidently
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PREMIUM RESOURCES
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GUESS PAPERS
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