Something I have come across is an opinion that the inventories are recorded in a \u201crisk free\u201d price if you don\u2019t add any overheads, payroll, depreciation or additional materials used in the production to the unit price and let it just be in its base material expense.\u00a0<\/p>\n
I have a feeling this opinion comes from the requirement that inventories should be measured at the lower of their cost or net realisable value. Whilst that\u2019s absolutely true, it doesn\u2019t mean that you should assume a potential and a very unlikely risk with the value of the inventory. Essentially what this \u201crisk free\u201d means is that first off the entity assumes that\u2019s the lowest market price they would get from the good is the price of the base material used and secondly they assume to take all other expenses as their loss and in fact they are sure this will happen with the particular items currently in stock.<\/p>\n
What\u2019s wrong with this picture?<\/p>\n
I will start from the second issue. The fact that the goods need to be recognized at the lower of doesn\u2019t mean that one should assume the market value is lowest. If it\u2019s not, it\u2019s not to be used. It\u2019s not \u201crisk free\u201d if you think you may be selling them at the material cost when in fact you know it\u2019s very unlikely to happen and nothing in your prior experience has shown or indicated you might sell the goods with a loss.<\/p>\n
Another point I wanted to make relates to the definition of \u201crisk free\u201d and it being the material cost. Why would someone assume that you\u2019re able to sell the item at its material cost? Why not even lower?<\/p>\n
I would like to emphasize that inventories are measured at the lower of their cost or net realisable value. Cost is a purchase price and \/ or costs made to produce the item. Net realisable value is what you\u2019d be able to get for the item less costs necessary to make the sale. And that\u2019s it. There\u2019s no \u201crisk free\u201d price by definition. Or, well, yes, but that would be 0, because that\u2019s really risk free.<\/p>\n","protected":false},"excerpt":{"rendered":"
Something I have come across is an opinion that the inventories are recorded in a \u201crisk free\u201d price if you don\u2019t add any overheads, payroll, depreciation or additional materials used in the production to the unit price and let it just be in its base material expense.\u00a0<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,31],"tags":[],"class_list":["post-4673","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-3-inventory"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4673","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=4673"}],"version-history":[{"count":1,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4673\/revisions"}],"predecessor-version":[{"id":4674,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4673\/revisions\/4674"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=4673"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=4673"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=4673"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}