Explanation

According to accounting standards (specifically IFRS and US GAAP), inventory is recorded at the lower of cost or net realizable value.

Key Concepts:

1. Cost: The original purchase cost plus any additional costs to bring the inventory to its present location and condition.

2. Net Realizable Value (NRV): The estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale.

3. Lower of Cost or NRV Principle: This is a conservative accounting principle that requires inventory to be written down to its net realizable value when the NRV is lower than the cost. This prevents overstatement of assets on the balance sheet.

Why not the other options:

• A. Market: While this was used in older accounting standards, modern standards use net realizable value which is more specific and relevant.
• C. Estimated Selling Price: This is only one component of net realizable value. NRV considers estimated selling price MINUS costs to complete and sell, making it a more accurate measure of what the inventory is actually worth.

Example:

• Inventory cost: $100
• Estimated selling price: $120
• Costs to complete and sell: $30
• Net Realizable Value: $120 - $30 = $90
• Since NRV ($90) < Cost ($100), inventory should be recorded at $90 (the lower value).