Advanced Accounting · AS 2 Valuation of Inventory

AS 2 Scope, Definitions and Meaning of Inventory for CA Inter

Updated 4 October 2026 · Fact-checked

AS 2 Valuation of Inventories sets how inventories are measured and disclosed. Inventories are assets held for sale in the ordinary course of business, in production for such sale, or as materials or supplies to be consumed in production or in rendering services. To solve questions, test the item against this definition, then check the exclusions.

Understand AS 2 Scope, Definitions and Meaning of Inventory

AS 2 is the accounting standard that tells you how to value inventories and what to disclose about them. Before you value anything, you must decide whether an item is inventory at all. That is what this topic tests.

The key idea is purpose of holding. The same item can be inventory in one business and a fixed asset in another. A machine is inventory for a machinery dealer. It is property, plant and equipment for the factory that uses it. So always ask: why is the entity holding this item?

AS 2 defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. So finished goods, work-in-progress, raw materials, stores and consumables are all inventory. Goods bought by a retailer for resale, and land or other property held for resale, also qualify.

AS 2 does not apply to everything that looks like stock. Its exclusions are:

Work-in-progress arising under construction contracts, including directly related service contracts. These are covered by AS 7.
Shares, debentures and other financial instruments held as stock-in-trade.
Producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases, to the extent they are measured at net realisable value under well-established practices in certain industries.

Do not treat work-in-progress of service providers as excluded. AS 2 covers it. It is measured at the cost of the service until the related revenue is recognised.

Stand-by equipment and spare parts are a separate point, not an AS 2 exclusion. Those that can be used only with a particular fixed asset, and whose use is irregular, are capitalised under AS 10. Other stores and spares are inventory under AS 2.

Two measurement terms appear in the definitions. Net realisable value (NRV) 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. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. NRV is entity-specific. Fair value is not. NRV is what you expect to get net of costs, so it is the figure used in the lower of cost and NRV test.

Key rules to remember

Definition of inventories: Inventories = assets (a) held for sale in the ordinary course of business, (b) in production for such sale, or (c) as materials or supplies to be consumed in production or in rendering services; Test every item against these three limbs and the purpose of holding.
Net realisable value: NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale; For finished goods, costs of completion are nil. Deduct only costs still to be incurred.
Measurement rule (link): Inventories are valued at the lower of cost and net realisable value; The scope and definitions you learn here feed this rule. It is studied in detail in the NRV topic.
Scope exclusions: Excluded: construction contract WIP (AS 7); shares, debentures and other financial instruments held as stock-in-trade; producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases measured at NRV; Service providers' WIP is not excluded. It is inside AS 2 and measured at cost of the service. Exam questions usually test one of the exclusions.
Fair value: Fair value = amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction; Do not use it as a synonym for NRV.

How to solve AS 2 Scope, Definitions and Meaning of Inventory questions

Use this order for any question on scope, definition or meaning of inventory.

1Read the facts and note what the entity does. Is it a trader, manufacturer, builder, service provider or investor?
2For each item, ask why it is held: for sale, for production, for consumption, or for long-term use.
3Match the item to the three limbs of the inventory definition. If it fits none, it is not inventory.
4Check the scope exclusions: construction contract WIP, financial instruments held as stock-in-trade, and producers' inventories measured at NRV. Remember that service providers' WIP is within AS 2.
5If an item is excluded, name the standard or treatment that applies instead, such as AS 7 for construction contract WIP. For spares usable only with a particular fixed asset and used irregularly, name AS 10.
6If NRV is asked, compute selling price less costs of completion and costs to make the sale. Use only costs that are still to be incurred.
7Write a clear conclusion for each item: inventory under AS 2 or not, with the reason in one line.

Quickest way: Purpose-and-exclusion check

When to use it: Use this for MCQs and for short written parts where you must classify items quickly.

MCQ: look for the purpose words. 'Held for resale' or 'to be consumed in production' point to inventory. 'Used for more than one year' or 'to earn rental' point away from it.
MCQ: if the option mentions construction contracts, shares held as stock-in-trade, or a producer's agricultural products at NRV, the item is outside AS 2.
MCQ on NRV: subtract only future costs from the expected selling price. Ignore costs already incurred.
Written: use a three-column layout of Item, Purpose of holding, Conclusion with reason. Each row earns a step mark.
Written: state the definition in one line at the start, then apply it. Name the correct alternative standard for excluded items.

Common mistakes in AS 2 Scope, Definitions and Meaning of Inventory

Treating every item in the godown as inventory.
Students focus on physical presence and ignore why the entity holds the item.
Fix: Apply the purpose test. Items held for long-term use are PPE, not inventory.
Saying shares held by a share trader are covered by AS 2.
Shares are called stock-in-trade, so students link them to stock.
Fix: Financial instruments held as stock-in-trade are excluded from AS 2. Name the exclusion in your answer.
Applying AS 2 to work-in-progress of a construction contractor.
The words work-in-progress suggest inventory.
Fix: Construction contract WIP is excluded and dealt with under AS 7.
Deducting costs already incurred while computing NRV.
Students confuse NRV with profit.
Fix: Deduct only estimated costs of completion and costs necessary to make the sale. Past costs belong to cost, not NRV.
Using fair value and NRV as the same thing.
Both relate to expected realisation.
Fix: Fair value is an arm's length exchange amount and is not entity-specific. NRV is the entity's expected net selling amount after future costs.

Worked examples

Example 1

Classify the following as inventory under AS 2 or not, with reasons: (a) Cars held by a car dealer for sale. (b) A car used by the same dealer for the manager's travel. (c) Shares held by a broker as stock-in-trade. (d) Packing materials held by a manufacturer for packing finished goods.

Show the solution

(a) The cars are held for sale in the ordinary course of business. They fit the first limb of the definition, so they are inventory.
(b) The car used by the manager is held for use in operations over several years. It is not for sale, so it is not inventory. It is property, plant and equipment under AS 10.
(c) Shares held as stock-in-trade are financial instruments. AS 2 excludes them from its scope, so they are not covered by AS 2.
(d) Packing materials are supplies to be consumed in the production process, so they fit the third limb and are inventory.

Answer: (a) Inventory. (b) Not inventory; PPE under AS 10. (c) Outside the scope of AS 2. (d) Inventory.

Example 2

A manufacturer has 1,000 units of a partly finished product. Cost incurred so far is ₹300 per unit. It expects to incur a further ₹40 per unit to complete it and ₹20 per unit for selling expenses. The expected selling price of the finished product is ₹350 per unit. Compute the net realisable value per unit and in total, and state whether NRV is lower than the cost incurred.

Show the solution

Estimated selling price = ₹350 per unit.
Less estimated costs of completion = ₹40 per unit.
Less estimated costs necessary to make the sale = ₹20 per unit.
NRV per unit = 350 − 40 − 20 = ₹290.
Total NRV = 1,000 × ₹290 = ₹2,90,000.
Cost incurred = 1,000 × ₹300 = ₹3,00,000. The cost of ₹300 already incurred is not deducted in NRV.
Compare: NRV ₹290 per unit is lower than cost ₹300 per unit.

Answer: NRV is ₹290 per unit, or ₹2,90,000 in total. It is lower than cost of ₹3,00,000, so under the lower of cost and NRV rule the stock would be valued at ₹2,90,000.

Exam tips

Start every classification answer with the definition in one line, then decide item by item. This structure earns marks even if one conclusion is wrong.
Memorise the three exclusions: construction contract WIP, financial instruments held as stock-in-trade, and producers' inventories at NRV. Questions often hide one of them, such as a contractor's WIP or a share dealer's holdings.
In NRV problems, list selling price and each future cost on separate lines. Do not subtract costs already incurred.
For MCQs, read for purpose of holding. The same item can be inventory in one case and PPE in another.
When an item is excluded, name where it is dealt with, for example AS 7 for construction contracts or AS 10 for PPE.

Practice questions from AS 2 Valuation of Inventory

AS 2 Scope, Definitions and Meaning of Inventory in other exams

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

AS 2 Scope, Definitions and Meaning of Inventory: frequently asked questions

What is inventory as per AS 2?

Inventory is an asset held for sale in the ordinary course of business, in production for such sale, or as materials or supplies to be consumed in production or in rendering services. It includes raw materials, WIP, finished goods and stores. The purpose of holding decides whether an item qualifies.

What is excluded from the scope of AS 2?

AS 2 excludes WIP arising under construction contracts (dealt with under AS 7), and shares, debentures and other financial instruments held as stock-in-trade. It also excludes producers' inventories of livestock, agricultural and forest products and mineral oils, ores and gases, to the extent they are measured at NRV under well-established industry practice. WIP of service providers is not excluded; it is measured at cost of the service until revenue is recognised.

What is net realisable value with an example?

NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale. If goods can be sold for ₹500, and selling costs are ₹30, NRV is ₹470. For finished goods there are no costs of completion.

How is fair value different from NRV?

Fair value is the amount at which an asset could be exchanged between knowledgeable, willing parties at arm's length. NRV is what the entity itself expects to realise after deducting future costs. NRV is entity-specific, while fair value is not.