Question

Question:Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment?

Short answer

The loss should be recorded for the decrease in the value of the inventory, and inventories will be reported at net realizable value.

Step-by-step solution

Step-by-step-solutionStep1:

Inventories are reported at the cost for which it is purchased. However, in the situation when the cost of inventories declines, it violates the historical cost principle, as a decline in the value of inventories is treated as a loss. And in the balance sheet, it will be shown at net realizable value, not at the cost.

Step 2:

Net realizable is the estimated amount to be collected from the sale of inventory. It can be calculated by deducting the estimated collection cost, disposal cost, transportation cost, from the original cost of the inventory.