Which statement is true about the use of the lower of cost and NRV in inventory valuation?

Which statement is true about the use of the lower of cost and NRV in inventory valuation?

• A. The lower of cost and NRV method is not required
• B. The lower of cost and NRV method is used to value inventory
• C. NRV is used only for fixed assets
• D. Inventory is valued at cost regardless of NRV

Answer: (B)

The main idea here is that inventories are measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business minus any estimated costs of completion and costs to sell. If NRV falls below cost, you write the inventory down to NRV, and the loss goes through the income statement; if NRV is higher, you keep the inventory at cost. So the statement that correctly reflects practice is that inventories are valued at the lower of cost and NRV. The other options aren’t correct because: the method is required under IFRS, not optional; NRV is used for inventory valuation, while impairment of fixed assets follows a different rule (recoverable amount under IAS 36); and inventory isn’t always carried at cost under these rules—if NRV is lower, you must write it down.

The main idea here is that inventories are measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business minus any estimated costs of completion and costs to sell. If NRV falls below cost, you write the inventory down to NRV, and the loss goes through the income statement; if NRV is higher, you keep the inventory at cost.

So the statement that correctly reflects practice is that inventories are valued at the lower of cost and NRV.

The other options aren’t correct because: the method is required under IFRS, not optional; NRV is used for inventory valuation, while impairment of fixed assets follows a different rule (recoverable amount under IAS 36); and inventory isn’t always carried at cost under these rules—if NRV is lower, you must write it down.