In short
Inventory measured using first-in, first-out (FIFO) or average cost is carried at the lower of its cost and its net realizable value: the estimated selling price less the costs to complete and sell it.
Key takeaways
- Last-in, first-out (LIFO) and the retail inventory method still use the older lower of cost or market test.
- A write-down is recognized in the period the value falls, usually in cost of goods sold.
- Under US Generally Accepted Accounting Principles (GAAP), written-down inventory is not written back up if prices recover.
Example
Goods cost $50,000; they can be sold for $47,000 with $5,000 of selling costs. Net realizable value is $42,000, so inventory is written down by $8,000.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company using FIFO holds inventory costing $50,000 with an estimated selling price of $54,000 and disposal costs of $6,000. At what amount should the inventory be reported?