## Core Measurement Principle
Inventories must always be valued at the lower of Cost or Net Realisable Value (NRV).
$$\text{Inventory Value} = \min(\text{Cost},\ \text{NRV})$$
| Scenario | Inventory Value |
|---|---|
| Cost \< NRV | Cost |
| NRV \< Cost | NRV |
| Cost = NRV | Either (same result) |
## Why This Rule Exists
Accounting follows the conservatism (prudence) principle — do not anticipate profits, but provide for all losses. If inventory has fallen in value below its cost, that loss must be recognised immediately.
## What Is Cost?
Cost = Cost of Purchase + Cost of Conversion + Other costs incurred to bring inventory to present location and condition.
## What Is NRV?
NRV = Estimated selling price − Estimated costs to complete production − Estimated selling costs
> NRV is NOT the same as selling price. You must deduct completion costs and selling costs.