ACCA Audit and Assurance (F8) Practice Exam

What factors should be considered when valuing inventories?

1. Current market trends

2. Lowest of "cost" or NRV

3. Sales projections for the next quarter

4. Supplier reliability

The correct answer is: Lowest of "cost" or NRV

When valuing inventories, the "lowest of cost or net realizable value (NRV)" principle is crucial. This concept, grounded in accounting standards, ensures that inventories are reported at the lower of their historical cost or the amount that can be realized from their sale. Valuing at the lower of cost or NRV helps to avoid overstating the value of inventory on the balance sheet and ensures that any potential losses in value are recognized timely. Cost refers to the acquisition price of inventory, while NRV is the estimated selling price in the ordinary course of business, minus estimated costs to complete and sell the inventory. This approach reflects a conservative method of reporting, minimizing the risk of accounting for inventory at an inflated value that may not be realizable. Other factors noted in the choices, while relevant in broader inventory management, do not directly influence the accounting valuation method as primarily dictated by the lowest of cost or NRV rule. Current market trends may influence pricing strategies but are not part of the formal valuation process. Similarly, sales projections, while useful for operational decisions, do not affect how inventory is reported on the financial statements. Lastly, supplier reliability concerns operational aspects such as supply chain management but does not directly impact the valuation methodology required in accounting standards