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Sales value (NRV) =50
Cost =40
Lower is Cost.
As per IAS2: inventory should be recorded at cost or net realizable value, whichever is lower.
Products are recorded in inventory as per the taken up policy in line with the IAS2, which allows for the product to be recorded at either AVCO or LIFO, FIFO is no more valid.Products are recorded at their cost and not a selling price because, in consideration with the going concern concept you simply cant value them on sales price and have to record them at cost, to better understand consider if these are recorded at selling price your P&L would be understated since you would be recording inventory at selling price which itself is cost + profit, after considering expenses of business it will always show loss, and would not give true and fair view of financial position.
IAS2 says, closing inventory should be valued at cost or net realisable value which ever is less. Set sales price is irrelevant-need to be prudent, not hypothetical. If in future closing stock is sold at less than the recorded cost, re-adjustment required in closing stock entry and effectively in subsequent opening stock as well.
Because when u sell inventory you mark up the cost by additional amount so that you can recover atleast your variable operating cost. u have to make a profit margin to continue business. to recover fixed cost u have to sell more number of units to reach breakeven
Not valuing items in inventory
