Measure inventory at the lower of cost and net realisable value
Apply IAS 2 to inventory cost, net realisable value, FIFO and weighted average cost, and explain why a write-down affects profit.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover the nine named IAS at the main-provisions level described in Cambridge teacher guidance, the stated ethical principles, audit and stewardship. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 and 3.1 statement skills: identify the reporting period, distinguish profit from cash, and explain how a reporting choice affects users of financial statements.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Cost is $12 per unit and NRV is $15. At what amount is the unit valued?
What you will learn
- Calculate inventory cost and net realisable value
- Apply the lower-of-cost-and-NRV rule
- Distinguish FIFO and AVCO and explain why LIFO is not permitted in the syllabus guidance
Include costs that bring inventory to its location and condition
IAS 2 values inventory at the lower of cost and net realisable value (NRV). Cost includes purchase costs, conversion costs and other costs needed to bring goods to their present location and condition. For manufactured goods, relevant conversion costs include direct production costs and appropriate production overheads.
NRV is the estimated selling price in the ordinary course of business less estimated completion and selling costs. If NRV is below cost, write inventory down and recognise the write-down as an expense in that period. If NRV exceeds cost, inventory stays at cost; the higher selling value is not recorded as an unrealised gain.
Use permitted cost formulas consistently
For interchangeable items, the syllabus teacher guidance discusses first in, first out (FIFO) and average cost (AVCO). FIFO assumes the earliest purchases are issued first. AVCO uses an average unit cost, commonly weighted by quantities. LIFO is not permitted in the guidance, and similar inventory is normally measured consistently.
For work in progress and finished goods, cost includes direct materials, direct labour, direct expenses and production overheads that bring the item to its current location and condition. Abnormal waste, selling costs and unrelated administration are not included merely because they occurred during production.
Pause and explain
NRV is $18,000 and cost is $20,500. What is the write-down?
Worked example
A batch costs $4,800. It can be sold for $4,500 after $300 completion costs and $200 selling costs. Calculate the closing inventory amount and write-down.
Show the worked solution
- NRV = $4,500 − $300 − $200 = $4,000.
- Compare cost of $4,800 with NRV of $4,000 and use the lower amount.
- Write-down = $4,800 − $4,000 = $800, recognised as an expense.
Answer Inventory is reported at $4,000; the $800 write-down is an expense for the period.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
For one product, cost is $30, NRV is $27 and 400 units remain. Calculate inventory and the write-down relative to cost.
Give me a hint
Select the lower unit amount first, then multiply by the remaining units.
Compare my reasoning
- Lower of $30 and $27 is $27 per unit.
- Inventory = 400 × $27 = $10,800.
- Cost before write-down = 400 × $30 = $12,000; write-down = $1,200.
Inventory $10,800; write-down expense $1,200.
Look for these in your work
- Lower amount selected
- Inventory total correct
- Write-down calculated
A shop has 50 items costing $16 each. Estimated selling price is $15 each and selling cost is $1.20 per item. Calculate NRV per item, the inventory value and the write-down.
Give me a hint
NRV is selling price less the necessary costs to sell.
Compare my reasoning
- NRV per item = $15 − $1.20 = $13.80.
- Lower of cost $16 and NRV $13.80 is $13.80.
- Inventory = 50 × $13.80 = $690; cost was $800, so the write-down is $110.
NRV $13.80 per item; inventory $690; write-down expense $110.
Look for these in your work
- NRV formula applied
- Lower value used
- Totals reconcile
A manufacturer has finished goods with direct material $8, direct labour $5 and allocated production overhead $4 per unit. Selling price is $21 and selling cost is $2 per unit. Explain the valuation and whether a $1 advertising cost per unit is included.
Give me a hint
Calculate production cost and NRV separately before comparing them.
Compare my reasoning
- Production cost = $8 + $5 + $4 = $17 per unit, assuming the overhead is an appropriate production cost.
- NRV = $21 − $2 = $19 per unit; lower of cost and NRV is $17.
- The $1 advertising cost is a selling cost and is not added to production inventory cost; do not confuse it with the estimated costs deducted when calculating NRV if it is a future cost necessary to sell.
Value each unit at $17. The advertising expense is not part of production cost; if it is a necessary cost to sell, include it when estimating NRV, which would then be $18 and still above cost.
Look for these in your work
- Production cost built correctly
- NRV compared with cost
- Selling cost treatment explained
Common mistakes
- Subtracting completion and sale costs twice
- Valuing inventory above cost when NRV is higher
- Including advertising or abnormal waste in production cost
What can you explain now?
How is closing inventory valued under IAS 2?
Compare with the explanation
At the lower of cost and net realisable value
The lower amount avoids carrying inventory above the value expected to be recovered through sale.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State the lower-of-cost-and-NRV rule and give one example of a cost included in inventory and one excluded cost.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.