Buying and storing inventory during the normal course of business means that you also have to initially price it and find means also to measure it in the future. When we talk about the value of inventory, we talk about two phases – initial recognition and subsequent measurement. They both have unique characteristics when it comes to policies.

On initial recognition when goods held for sale are bought, the unit price should include all the following costs:

– purchase price;
– import duties and other non-recoverable taxes;
– transport;
– handling; and
– other costs directly attributable to the acquisition of finished goods, materials and services.

Note here that also all trade discounts, rebates and similar items shall also be deducted from the cost price when initially recognizing an item as goods held for sale.

Now that the item has been initially recognized, it needs to be measured for any impairment later on. Essentially inventories are measured at the lower of cost and estimated selling price less any costs to complete the sell. For an example when an item has a cost price on the balance sheet of a 100, and the management estimates that this will be sold with about 80, there’s a definite indication that the item is overvalued on the balance sheet. Provided that the costs required for the sale to happen are 10, the new value of the item on the balance sheet should be 70 (80 less 10).

Inventory, when it primarily comprises of bought goods, is easy to recognize and measure on the balance sheet if you keep in mind those simple rules – make sure all required costs are included and consider also the subsequent measurement.