Accounting for Inventory

7.1 Valuation Methods

AS 2 / Ind AS 2: Inventory must be valued at the lower of cost or net realisable value (LCNRV).

Cost formula methods:

• FIFO (First-In-First-Out): Oldest inventory valued first; ending inventory reflects recent costs; allowed under Ind AS 2
• Weighted Average Cost: Average cost of all units; smooths out price fluctuations; allowed under Ind AS 2
• LIFO (Last-In-First-Out): Most recent inventory valued first; not permitted under IFRS / Ind AS 2; allowed under US GAAP

Net Realisable Value (NRV): Estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs to make the sale.

Why LCNRV? Reflects the prudence (conservatism) concept — do not carry inventory at a value higher than what it will generate.

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