Corporate Accounting and Financial Management · Accounting Standards

AS 2 Valuation of Inventories: Cost, NRV and Cost Formulas

Updated 11 October 2026 · Fact-checked

AS 2 says you measure inventories at the lower of cost and net realisable value (NRV). Cost covers purchase, conversion and other costs to bring items to present location and condition. NRV is estimated selling price less estimated costs of completion and costs necessary to make the sale. Compare item by item, then apply FIFO or weighted average.

Understand AS 2 Valuation of Inventories

Inventories are goods held for sale, goods in production, or materials and supplies to be used in production or in giving services. AS 2 tells you what value to put on them in the balance sheet at the year end.

The core rule is prudence. Show inventory at the lower of cost and net realisable value. If goods will sell for less than they cost, you book the loss now, in the year the value fell, and not in the year of sale.

Cost has three parts: cost of purchase (price, duties and taxes that are not recoverable, freight inwards, less trade discounts and rebates), cost of conversion (direct labour and a systematic share of production overheads), and other costs incurred to bring the inventory to its present location and condition. Interest, selling costs, storage costs not needed in production, and abnormal wastage are not included. Recoverable GST is not part of cost.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. Materials held for use in production are not written down below cost if the finished goods they go into are expected to sell at or above cost.

When identical items are bought at different prices, you need a cost formula. Specific identification is used for items that are not ordinarily interchangeable. Otherwise use FIFO or weighted average. Under FIFO, closing stock is the latest purchases. Under weighted average, all units carry one average cost. Standard cost or the retail method may be used only if the result approximates cost. Disclosure covers the accounting policy and cost formula, total carrying amount and its classification (raw materials, work in progress, finished goods, stores and spares).

Key rules to remember

Measurement rule: Closing inventory value = Lower of (Cost, Net realisable value); Apply to each item or to groups of similar items, not to the grand total of all stock.
Cost of inventory: Cost = Purchase cost + Conversion cost + Other costs to bring to present location and condition; Purchase cost is net of trade discounts and rebates and excludes recoverable taxes such as GST input credit.
Net realisable value: NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs; Use the estimate at the balance sheet date. Cost of completion is zero for finished goods.
Weighted average cost: Average cost per unit = (Cost of opening stock + Cost of purchases) ÷ (Units in opening stock + Units purchased); Can be computed periodically or after each purchase (moving average). Say which one you use.
FIFO: Closing stock units are valued at the prices of the most recent purchases; Issues are assumed to come from the earliest stock first.
Excluded costs: Exclude: abnormal wastage, storage (unless necessary in production), administrative overheads not related to production, selling costs; These are charged to profit and loss in the period incurred.

How to solve AS 2 Valuation of Inventories questions

Use this order for any AS 2 problem, whether it asks for closing stock value, cost, or the write-down.

1List each item or group separately with quantity, so you can compare item by item.
2Find cost for each item. Include purchase price net of trade discount, freight inwards, non-recoverable duties, and conversion costs. Remove recoverable GST, abnormal wastage, interest and selling costs.
3If units were bought at different prices, apply the stated cost formula (FIFO or weighted average) to get cost of closing units.
4Find NRV for each item: estimated selling price less cost to complete and cost to sell.
5Pick the lower of cost and NRV for each item, then multiply by units if you worked per unit.
6Add the item values to get closing inventory. Write-down equals total cost minus total value taken.
7State the conclusion and, if asked, the disclosure: policy, cost formula, carrying amount by classification.

Quickest way: Table method: Cost | NRV | Lower

When to use it: Use when a question gives several items with costs and selling prices, and asks for the value of closing stock.

Draw four columns: Item, Cost, NRV, Lower of the two.
Clean the cost first (drop recoverable taxes and non-cost items), then compute NRV.
Circle the smaller figure in each row and total the last column.
For FIFO or average, compute closing units cost in a small side table before filling the cost column.

Common mistakes in AS 2 Valuation of Inventories

Comparing total cost with total NRV of all stock.
It looks quicker and students think one comparison is enough.
Fix: Compare item by item, or group by similar items, then add the lower values.
Including selling expenses or interest in cost.
Students treat every expense connected to goods as part of cost.
Fix: Include only costs to bring goods to present location and condition. Selling costs go into NRV as a deduction, not into cost.
Forgetting to deduct selling costs and cost of completion from selling price when finding NRV.
Selling price is given, so it is used directly.
Fix: Always write NRV = selling price − completion cost − selling cost before comparing.
Adding recoverable GST to the cost of purchase.
Invoice value is used as cost without checking input credit.
Fix: Exclude taxes the entity can recover from tax authorities. Include only non-recoverable duties and taxes.
Using FIFO closing stock from the oldest purchases.
Students confuse which units remain after issues.
Fix: Under FIFO the oldest units are issued first, so remaining units come from the latest purchases.
Writing down raw materials just because the market price of materials fell.
Students apply the NRV test to materials in isolation.
Fix: Write down materials only if the finished goods are expected to sell below cost. Then replacement cost may be the best measure of NRV.

Worked examples

Example 1

A company has the following closing stock on 31 March. Item A: 100 units, cost ₹50 per unit, estimated selling price ₹60 per unit, selling cost ₹4 per unit. Item B: 200 units, cost ₹80 per unit, estimated selling price ₹85 per unit, selling cost ₹10 per unit. Item C: 50 units, cost ₹120 per unit, estimated selling price ₹150 per unit, selling cost ₹5 per unit. Find the value of closing stock under AS 2.

Show the solution

Item A: NRV per unit = 60 − 4 = ₹56. Cost is ₹50. Lower is ₹50. Value = 100 × 50 = ₹5,000.
Item B: NRV per unit = 85 − 10 = ₹75. Cost is ₹80. Lower is ₹75. Value = 200 × 75 = ₹15,000.
Item C: NRV per unit = 150 − 5 = ₹145. Cost is ₹120. Lower is ₹120. Value = 50 × 120 = ₹6,000.
Total = 5,000 + 15,000 + 6,000 = ₹26,000.
Total cost = 5,000 + 16,000 + 6,000 = ₹27,000. Write-down = ₹1,000, all on Item B.

Answer: Closing stock is valued at ₹26,000. A write-down of ₹1,000 on Item B is charged to the statement of profit and loss for the year, because AS 2 requires the lower of cost and NRV for each item.

Example 2

A trader records for a product: opening stock 100 units at ₹10; purchases on 10 April 200 units at ₹12; purchases on 20 April 100 units at ₹14. Sales during April were 250 units. Find the closing stock value under (a) FIFO and (b) weighted average (periodic).

Show the solution

Units available = 100 + 200 + 100 = 400. Closing units = 400 − 250 = 150.
(a) FIFO: closing units come from the latest purchases. 100 units at ₹14 = ₹1,400. Remaining 50 units at ₹12 = ₹600. Closing stock = ₹2,000.
(b) Total cost = 100 × 10 + 200 × 12 + 100 × 14 = 1,000 + 2,400 + 1,400 = ₹4,800.
Average cost per unit = 4,800 ÷ 400 = ₹12.
Closing stock = 150 × 12 = ₹1,800.
Difference: FIFO gives ₹200 higher closing stock because prices were rising.

Answer: Closing stock is ₹2,000 under FIFO and ₹1,800 under weighted average. In a period of rising prices, FIFO shows higher closing stock and higher profit. Each is then compared with NRV before final valuation.

Exam tips

Show the NRV working line by line. Marks are given for method even if you slip on a figure.
State the rule in one line first: lower of cost and net realisable value, then apply it item by item.
In FIFO and average problems, check units first: opening plus purchases minus issues equals closing units.
In theory questions, list what is included in cost and what is excluded, with the reason for each exclusion.
Close the answer with the effect: the write-down is charged to profit and loss in the year it occurs.

Practice questions from Accounting Standards

AS 2 Valuation of Inventories 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 Valuation of Inventories: frequently asked questions

What is the difference between FIFO and weighted average cost under AS 2?

FIFO assumes the oldest units are used or sold first, so closing stock carries the latest purchase prices. Weighted average gives every unit the same average cost of opening stock and purchases. When prices are rising, FIFO usually gives higher closing stock and profit.

How do I calculate net realisable value under AS 2?

Take the estimated selling price in the ordinary course of business. Deduct the estimated cost of completion, if any, and the estimated costs necessary to make the sale. The result is NRV, which you compare with cost.

Should I compare cost and NRV for each item or for total stock?

Compare item by item, or by groups of similar or related items. Setting off a gain on one item against a loss on another hides the write-down that AS 2 requires.

Can I use LIFO under AS 2?

No. AS 2 allows specific identification for non-interchangeable items, and FIFO or weighted average for others. Standard cost or the retail method can be used only where the result approximates cost.