When a question states a valuation rule, apply it exactly. For inventory in IGCSE Accounting, the rule is usually the lower of cost and net realisable value (NRV), taken item by item. Always check the wording of your question, and check the current Cambridge IGCSE Accounting 0452 syllabus page for what your exam year expects.
This lesson follows purchases and expense recognition and shows how closing inventory is valued before it goes into cost of sales.
What do cost and NRV mean?
Cost is what the business paid to bring the item to its present condition and location. That includes the purchase price and carriage inwards.
NRV is the expected selling price, less the costs of selling it. If an item has been damaged or has become out of date, its NRV can fall below cost. Cost is only the starting point, and the lower figure is the one that goes into the accounts.
How to apply it, step by step
- List the items with their cost and expected selling price.
- Calculate NRV for each item: expected selling price − costs of selling.
- Compare cost and NRV for that item and choose the lower.
- Add the chosen figures to get closing inventory.
- Find the write-down (total cost − valuation), if the question asks, and note that it increases cost of sales.
Worked example
Kedai Elektrik counts three items at 31 December 2025.
| Item | Cost (RM) | Expected selling price (RM) | Selling costs (RM) |
|---|---|---|---|
| A | 1,200 | 1,800 | 100 |
| B | 900 | 1,000 | 150 |
| C | 500 | 450 | 50 |
NRV: A = 1,800 − 100 = 1,700. B = 1,000 − 150 = 850. C = 450 − 50 = 400.
Lower figure: A is 1,200 (cost is lower). B is 850 (NRV is lower). C is 400 (NRV is lower).
Closing inventory: 1,200 + 850 + 400 = RM 2,450.
Check: total cost is 1,200 + 900 + 500 = RM 2,600. The write-down is 2,600 − 2,450 = RM 150, made up of RM 50 on B and RM 100 on C. Closing inventory is RM 150 lower, so cost of sales is RM 150 higher and profit is RM 150 lower.
The mistake to watch for
A common slip is to compare the totals instead of each item.
Mistaken working: total cost 2,600 against total NRV 2,950, so closing inventory is RM 2,600
The student let the large gain on item A (NRV RM 500 above cost) cancel the losses on B and C.
Prudence does not allow a gain to be recognised before a sale, so item A stays at cost, RM 1,200. The correct closing inventory is RM 2,450, which is RM 150 lower than the mistaken answer. Comparing item by item is the safe habit.
Check yourself
1. An item cost RM 640 and can be sold for RM 700, but selling costs of RM 90 are needed. At what value is it included in inventory?
Show answer
NRV: 700 − 90 = 610. Cost is 640. The lower figure is RM 610.
2. Item X cost RM 300 with NRV RM 350. Item Y cost RM 420 with NRV RM 380. What is the inventory valuation?
Show answer
X: lower of 300 and 350 is 300. Y: lower of 420 and 380 is 380. Total RM 680. The total cost is RM 720, so the write-down is RM 40.
3. An item cost RM 80, will sell for RM 120 and needs RM 15 of selling costs. What value is used, and why?
Show answer
NRV: 120 − 15 = 105. Cost is 80. The lower figure is RM 80. The business does not record the expected gain until the item is sold.
Where this leads next
Valuation errors change profit, which the next lesson examines in the effect of a closing-inventory error on profit. The percentage-base explorer can help when a question gives selling costs as a percentage.
If prudence still feels like a rule to memorise instead of a reason, online one-to-one Accounting tuition can help you explain it in your own words.