Task 2.

3
Describe the principles of inventory valuation and list down
the methods of computing the cost of inventory?

International Accounting Standards (IAS 2) requires that inventory should be

calculated at the lower of cost and net realizable value. The objective of IAS 2 is to
prescribe the accounting treatment for inventories. It provides guidance for
determining the cost of inventories and for subsequently recognizing an expense,
including any write-down to net realizable value. It also provides guidance on the
cost formulas that are used to assign costs to inventories

The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or
weighted average cost formula. An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity. Amount of any write-down
of inventories to net realisable value and all losses of inventories shall be recognised
as an expense in the period the write-down or loss occurs.

A taxpayer's method of accounting for inventory must clearly reflect income in order
for it to be used for tax purposes. In deciding whether a particular method of
inventory accounting clearly reflects income, significant weight is generally accorded
to trade practice.

There are three methods of cost of inventory valuation.

 First in last out (FIFO)

 Weighted average cost (AVCO)
 Last in first out (LIFO)

http://smallbusiness.chron.com/generally-accepted-accounting-principles-relating-
inventory-method-4898.html

http://www.iasplus.com/en/standards/ias/ias2