Financial Accounting · Inventories

Inventory Valuation under IAS 2: Cost and NRV

Q: What does IAS 2 apply to?

It applies to inventories: goods held for sale, work in progress and materials used in production or services. Some items, such as financial instruments, are outside its scope, but you rarely need these in the exam.

Q: What is net realisable value?

NRV is the estimated selling price less the estimated costs to complete the item and the costs needed to sell it. It is the net cash you expect from the item.

Q: Can inventory ever be valued above cost?

No. If NRV is higher than cost, you keep inventory at cost. Profit is recognised only when the goods are sold.

Q: Where is an inventory write-down recorded?

It is charged to profit or loss, normally as part of cost of sales, in the period the write-down happens. Closing inventory in the statement of financial position is reduced to the lower figure.

Updated 11 October 2026 · Fact-checked

IAS 2 Inventories requires you to value inventory at the lower of cost and net realisable value (NRV), item by item where practical. Cost includes purchase price, conversion costs and other costs to bring inventory to its present location and condition. NRV is estimated selling price less estimated costs to complete and sell.

Understand Inventory Valuation under IAS 2

Inventory is unsold stock at the year end. It is an asset, so it sits in the statement of financial position. It also affects profit, because closing inventory is deducted from purchases and opening inventory to give cost of sales.

IAS 2 Inventories covers three types of inventory: goods held for sale in the ordinary course of business, work in progress, and materials or supplies to be used in production or in providing services. In the exam, you mostly deal with goods for resale and simple manufacturing costs.

The core rule is that inventory is measured at the lower of cost and net realisable value. Why? An asset should not be carried at more than the cash it will bring in. If goods cost $10 but can only be sold for $7 net, carrying them at $10 overstates assets and profit. So you write them down to $7 and recognise the loss straight away. This follows prudence in spirit: losses are recognised early.

Cost includes all costs of purchase (price, import duties and non-recoverable taxes, transport inwards, less trade discounts and rebates), costs of conversion (direct labour and a systematic allocation of production overheads) and other costs needed to bring the inventory to its present location and condition. Costs excluded are abnormal waste, storage costs (unless needed in the production process), administrative overheads and selling costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Compare cost with NRV for each item or group of similar items, never as one grand total. Gains on one line cannot offset losses on another.

Key formulas to remember

Measurement rule: Inventory value = lower of (cost, NRV); Apply it item by item, or to groups of similar items. Do not compare totals.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated selling costs; Selling costs include commission, packaging for sale and delivery to the customer if the seller pays.
Cost of inventory: Cost = purchase costs + conversion costs + other costs to bring to present location and condition; Purchase costs are net of trade discounts and rebates. Settlement discounts are not deducted in the cost rules you need here unless the question says otherwise.
Costs excluded from inventory: Excluded: abnormal waste, general storage, administrative overheads, selling costs; These are expensed in the period they occur.
Write-down: Write-down = cost − NRV (only where NRV < cost); Charged to profit or loss, normally within cost of sales.

How to solve Inventory Valuation under IAS 2 questions

Use this order for any IAS 2 valuation question, whether it is multiple choice or number entry.

1List each inventory item or group of similar items separately.
2Work out cost for each item. Include purchase price, transport inwards, import duties and conversion costs. Deduct trade discounts. Leave out storage, admin and selling costs.
3Work out NRV for each item: selling price less any costs still to complete and any selling costs.
4Compare cost and NRV for each item and pick the lower.
5Add the chosen figures to get the total inventory value. Do not net gains against losses.
6If asked for the write-down, subtract the chosen value from cost for each item where NRV is lower, then total these.
7Check you answered the question asked: closing inventory value, the write-down, or the effect on profit.

Quickest way: Three-column scan

When to use it: Use this for objective test questions with several items or a short scenario, when you have about three minutes per question at most.

Draw three columns on your scratch paper: Cost, NRV, Lower.
Fill Cost first, adding only allowable costs such as carriage inwards.
Fill NRV as selling price minus costs to complete and sell.
Circle the smaller number in each row and total the Lower column.
Match your total to the options. If the question asks for the write-down, subtract from total cost instead.

Common mistakes in Inventory Valuation under IAS 2

Including selling or distribution costs in the cost of inventory.
Students think any cost linked to the goods belongs in inventory.
Fix: Only costs that bring inventory to its present location and condition count. Delivery to customers, admin and general storage are expenses.
Using selling price instead of NRV.
The selling price is the most obvious figure in the question.
Fix: Always deduct costs still to complete and costs to sell before comparing with cost.
Comparing total cost with total NRV.
It feels quicker than item by item.
Fix: Compare line by line. A profit on one item cannot cancel a loss on another.
Writing inventory up above cost when NRV is higher.
Students assume the lower rule works both ways.
Fix: If NRV exceeds cost, keep cost. IAS 2 never allows inventory to be valued above cost.
Forgetting costs to complete for work in progress.
Students focus on the selling cost only.
Fix: For partly finished goods, deduct both the remaining production cost and the selling cost from the selling price.
Including abnormal waste in cost.
All production losses seem part of production cost.
Fix: Normal losses stay in cost. Abnormal waste is written off as an expense.

Worked examples

Example 1

At the year end, a company holds three products. Product A: cost $12,000; selling price $15,000; selling costs $1,000. Product B: cost $8,000; selling price $9,000; selling costs $1,500. Product C: cost $5,000; selling price $7,000; selling costs $500. What is the total closing inventory value under IAS 2?

Show the solution

Product A: NRV = 15,000 − 1,000 = 14,000. Cost is 12,000, which is lower. Value 12,000.
Product B: NRV = 9,000 − 1,500 = 7,500. Cost is 8,000, so NRV is lower. Value 7,500.
Product C: NRV = 7,000 − 500 = 6,500. Cost is 5,000, which is lower. Value 5,000.
Total = 12,000 + 7,500 + 5,000 = 24,500.

Answer: $24,500

Example 2

A manufacturer has 1,000 units of a partly finished item in inventory. Costs to date are materials $6,000, direct labour $3,000 and production overheads $1,000. Storage costs of $500 and administrative overheads of $700 have also been incurred. Further costs of $2,000 are needed to complete the units, and selling costs will be $1,500. The finished units will sell for $11,000 in total. At what value should the units be held?

Show the solution

Cost = 6,000 + 3,000 + 1,000 = 10,000. Storage and administrative overheads are excluded.
NRV = 11,000 − 2,000 (to complete) − 1,500 (to sell) = 7,500.
Compare: NRV of 7,500 is lower than cost of 10,000.
Inventory is valued at 7,500. The write-down is 10,000 − 7,500 = 2,500, charged to profit or loss.

Answer: $7,500 (write-down of $2,500)

Exam tips

Read what is being asked: closing inventory value, write-down amount, or effect on profit. Many wrong answers are right calculations of the wrong figure.
Cross out costs that IAS 2 excludes before you add anything: admin, selling, abnormal waste and general storage.
In multiple response questions, check each statement against the rule: lower of cost and NRV, never above cost, item by item.
For number entry, show your workings on scratch paper and enter only the final figure in the format asked.

Practice questions from Inventories

Inventory Valuation under IAS 2 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inventory Valuation under IAS 2: frequently asked questions

What does IAS 2 apply to?

It applies to inventories: goods held for sale, work in progress and materials used in production or services. Some items, such as financial instruments, are outside its scope, but you rarely need these in the exam.

What is net realisable value?

NRV is the estimated selling price less the estimated costs to complete the item and the costs needed to sell it. It is the net cash you expect from the item.

Can inventory ever be valued above cost?

No. If NRV is higher than cost, you keep inventory at cost. Profit is recognised only when the goods are sold.

Where is an inventory write-down recorded?

It is charged to profit or loss, normally as part of cost of sales, in the period the write-down happens. Closing inventory in the statement of financial position is reduced to the lower figure.