We received an email from our blog reader with respect to the valuation of inventory.
Should inventory be valued at
(I) Lower of cost or Net Realizable Value
(II) Lower of cost and Net Realizable Value
What is your answer then ? (I) or (II)?
Let's explain the question by using a sample, assuming Mobile phone distributor bought 10 pcs of iPhone at USD $ 150, and the selling price per pcs are USD $ 200. Should the inventory valued at USD $ 150 per pcs or USD $ 200 per pcs?
Before answering the questions, let's find out the meaning of 'Net Realizable Value'. 'Net Relizable Value' represents the amount 'realized'/ 'received' in an open market upon selling the goods. Hence, it is the selling price of the goods.
In this case, note (II) appears to be in conflict, as we can't valued the cost at USD $150 AND USD $ 200 at the same time. However, we should valued the iPhone at lower of cost or net realizable value, which is USD $ 150 per pcs.