Under IAS 2, how should inventory be valued?

Under IAS 2, inventory should be valued at the lower of cost and net realizable value. This approach ensures that inventory is not overstated on the balance sheet and reflects a more accurate picture of the company’s financial position.

Cost encompasses all expenditures directly attributable to bringing the inventory to its current condition and location. Net realizable value represents the estimated selling price in the ordinary course of business, less any costs of completion and costs necessary to make the sale. By requiring inventory to be reported at the lower of these two amounts, IAS 2 prevents assets from being carried at a value that is higher than what can be realized from their sale. This aligns with the principle of prudence in accounting, which aims to avoid overstatement of assets and income.

The other options do not align with this crucial principle. Valuing inventory solely at cost ignores potential impairments in value that could arise if market conditions change. Valuing it only at the estimated selling price or as selling price minus costs to sell would not account for costs incurred to prepare the inventory for sale, which is contrary to the way costs should be recognized under the standard. Thus, the correct valuation method under IAS 2 is to use the lower of cost and net realizable value