Why auditor ask any impairment on inventory

MPERS section 13 Inventories

When performing an inventory audit, some of the most common challenges faced by the auditor include: Damaged inventory whose value must be adjusted to reflect its actual value to the company. ... Errors in shipping and receiving of goods can lead to an incorrect end-of-year cutoff total in inventory records

How should we value inventories?

Generally, inventories are valued at cost!

However, if the net realizable value (NRV) of the inventory is less than the cost, the NRV will usually need to be reported on the balance sheet instead of the cost.

What is the cost?

Cost consists of the cost of purchase, conversion, production overheads, joint products and by-products, and other relevant cost.

What is the net realizable value (NRV)?

Net realizable value (NRV) is defined as the expected selling price minus cost of completion.

In what situation we use NRV?

It requires the valuation of inventories at the lower of its historical cost or market value, but if market value cannot be calculated, then the net realizable value of the inventory should be used.

In practice, these are the scenarios where NRV come to the picture: -

1) Oversupply

2) Obsolescence

3) Price decline

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