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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

At the year end, Oriel Co has inventory that cost $18,000. Due to damage, it can only be sold for $14,500 after incurring selling costs of $1,500. At what amount should this inventory be stated in the statement of financial position, and which concept supports this?

Inventory should be stated at $13,000. Net realisable value is the $14,500 selling price less $1,500 selling costs, and this is lower than the $18,000 cost. The lower of cost and NRV rule reflects prudence by avoiding overstated assets.

  1. A$18,000, historical cost
  2. B$14,500, net realisable value is selling price only
  3. C$13,000, lower of cost and net realisable value supported by prudenceCorrect
  4. D$16,000, average of cost and selling price

Explanation

NRV = $14,500 - $1,500 = $13,000, which is lower than cost of $18,000. Inventory is valued at the lower of cost and NRV, reflecting prudence in not overstating assets. Using $14,500 ignores the selling costs.

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