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Subsequent Measurement of Inventory

1. Inventory is measured at the lower of cost or net realizable value at the end of each reporting period. Net realizable value is estimated selling price less estimated costs to complete and sell. 2. If net realizable value is lower than cost, inventory is written down through a loss recognized in earnings or an allowance account. 3. Calculations are done on an item by item basis to determine the lower of cost or net realizable value for each inventory item. The total lower of cost or net realizable value is reported on the balance sheet.

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527 views2 pages

Subsequent Measurement of Inventory

1. Inventory is measured at the lower of cost or net realizable value at the end of each reporting period. Net realizable value is estimated selling price less estimated costs to complete and sell. 2. If net realizable value is lower than cost, inventory is written down through a loss recognized in earnings or an allowance account. 3. Calculations are done on an item by item basis to determine the lower of cost or net realizable value for each inventory item. The total lower of cost or net realizable value is reported on the balance sheet.

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Subsequent Measurement of Inventory

Learning objectives:
1. Calculate inventory net realizable value.
2. Present inventories at lower of cost and Net realizable value
3. Prepare journal entries relative to inventory write-down
4. Calculate COGS with the effect of inventory write-down

At the end of each reporting period, inventory’s carrying amount shall be the lower of cost and
net realizable value (LCNRV). Under IFRS, inventories shall be measured at the lower of cost and
net realizable value. The practice of writing down below cost to net realizable value is
consistent with the view that assets shall not be carried in excess of amounts expected to be
realized from their sale or use (conservatism principle-a accountant shall lean towards the less
favorable outcome for the entity).
DETERMINING THE NET REALIZABLE VALUE
Net realizable value (NRV) refers to the net amount that an entity expects to realize from the
sale of inventory in the ordinary course of business. (PAS 2.7) NRV is computed as the
estimated selling price in the ordinary course of business less estimated costs to dispose/sell
and estimated costs of completion. NRV= Selling price – Cost to complete – Cost of disposal
Estimated selling price – is normally the list price adjusted for any expected price concessions
to be made when the inventory items are to be sold. This is not necessarily equal to the normal
selling price of inventory items.
Cost to sell include sales commission, distribution costs, freight out, and other costs which are
directly related to selling of the inventory.
Cost to complete – comprise the direct materials and conversion costs needed to complete the
work-in-process inventory.
Guide in determining the amount NRV:

Type of Inventories Amount of Net Realizable Value


Finished goods Estimated selling price less costs to sell
Damaged goods Estimated selling price (which is lower than the normal selling price
Due to the goods’ lower quality) less costs to sell and costs to rectify,
if not yet rectified.)
Work in Process Estimated selling price less costs to sell and costs to complete
Materials, including Replacement cost since the materials are not really sold but used in
factory supplies the production instead. Replacement cost is the amount that shall be
paid if the materials are to be purchased on reporting date.

Rule: Cost > NRV measure inventory at NRV, with inventory writedown
Cost < NRV measure inventory at cost, no inventory writedown
Inventories are usually written down to net realizable value on an item by item or individual
basis.
Accounting Methods:
1. Direct method or cost of goods method-inventory is recorded at the lower of cost or net
realizable value. Any loss on inventory writedown or gain on reversal of inventory writedown is
not accounted separately “buried” in the cost of goods sold.
Entry: Inventory, end xxx
Income Summary xxx
2. Allowance method or loss method- inventory is recorded at cost and any loss on inventory
writedown is accounted separately.
Entry: Loss on Inventory writedown - xxx
Allowance on Inventory writedown xxx
If the required allowance decreases, a gain on reversal of inventory writedown is recorded but
limited only to the extent of the allowance balance.
Entry: Allowance for Inventory writedown xxx
Gain on Reversal on Inventory writedown (deducted from COGS)
FS Presentation:
Balance Sheet: Current Asset – Inventory xxx
Less: Allowance for Inventory writedown xxx

Inventory, beg. xxx


Net Purchases xxx
Total Goods Available for Sale xxx
Less: Inventory, end xxx
COGS before writedown xxx
Add: Loss on Inventory writedown xxx
COGS after writedown xxx
===
Steps in the Computation of COGS:
1. Compute for the NRV per unit
2. Multiply the cost per unit and the NRV per unit to the number of units
3. Select the lower between cost and NRV
4. Get the total of cost and LCNRV
5. Compare cost and LCNRV

Illustration:
The inventory of Hallyu Company at the end of the year needs to be reviewed on its recording
and measurement at LCNRV. The following information is provided to you:

Units Cost per Unit Selling Price Selling Cost


Blackpink THE Album 500 1,400.00 2,428.00 828.00
BTS Map of the Soul 1,700 1,000.00 1,800.00 917.65
TWICE More and More 500 800.00 1,250.00 250.00
GOT7 Call My Name 2,000 1,100.00 2,088.00 838.00

How much shall be reported as inventories in the Statement of Financial Position as at period
end? Prepare the journal entries.

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