IGCSE Accounting: Valuation of inventory (Cambridge 0452) – Revision Notes

Syllabus edition note. This resource follows the Cambridge IGCSE Accounting 0452 syllabus (and Cambridge O Level Accounting 7707, which has the same subject content for the same series) for exams in 2027, 2028 and 2029 (version 1), first examined in the March 2027 series in India and the June 2027 series elsewhere. If you sit 0452 in November 2026, you sit the 2026 syllabus (version 2), which differs: Paper 1 has 35 multiple-choice marks in 1 hour 15 minutes, not 40 marks in 1 hour 30 minutes; Topic 7 is “Accounting principles and policies”, without 7.2 Ethical considerations or 7.3 Technology and sustainability; 4.4 is “Irrecoverable debts and provision for doubtful debts”; income statements are named instead of statements of profit or loss; three-column running balance accounts are not required; Clubs and societies is 5.4 and Manufacturing accounts 5.5; and 6.3 is “Inter-firm comparison”. For this topic, the 2026 syllabus says “recovery of debts written off” where the 2027-2029 syllabus says “irrecoverable debts recovered”, asks for simple inventory valuation statements, and does not separately list choosing a depreciation method for each type of non-current asset, journal entries for purchasing a non-current asset, or calculating the profit or loss on disposal. If you sit in November 2026, work from the 2026 syllabus on the Cambridge International website.

Condensed recall for section 4.5 of Cambridge IGCSE Accounting 0452 (syllabus for exams in 2027, 2028 and 2029, version 1). For the full explanation and longer worked examples, use the study guide. Then test yourself with the practice questions. Related pages: the Cambridge IGCSE Accounting hub, the printable checklist, the free diagnostics and the wider Accounting Procedures revision notes. Amounts are in dollars ($).

The three official points

1. The valuation of inventory at the lower of cost and net realisable value.
2. How to calculate the value of inventory.
3. The effect of an incorrect valuation of inventory on gross profit, profit for the year, equity and asset valuation.

Key terms

Term	Meaning
Cost	What the business paid for the units (given per unit in a question)
Selling price	What the units are expected to sell for
Costs still to pay	Repairs, repackaging, commission, delivery to the customer
Net realisable value (NRV)	Expected selling price less costs still to pay
Value per unit	The lower of cost and NRV
Mark-up	Profit as a percentage of cost
Margin	Profit as a percentage of selling price

Method: valuing inventory

1. List each item (or group of identical items) with its units.
2. Find NRV per unit: selling price − repair, repackaging, commission or delivery.
3. Choose the lower of cost and NRV for that item.
4. Multiply by the number of units.
5. Add the item values. Never compare the two grand totals.
6. If NRV was lower, the write-down is units × (cost − NRV).

Why: prudence says expected losses are recognised now. Realisation and historic cost say expected profits are not recognised until the goods are sold, so inventory is never shown above cost.

Worked reminders

Cost is lower. Roddick Rugs holds 40 rugs that cost 18.50 each. They sell for 29.00 each with 3.50 commission. NRV = 29.00 − 3.50 = 25.50. Cost is lower, so value = 40 × 18.50 = 740.

NRV is lower. Roddick Rugs also holds 60 lamps that cost 34 each. After a repair costing 6 per lamp they sell for 45, and delivery costs 7.

NRV per lamp   45 − 6 − 7           = 32
Lower          32 (NRV, not 34)
Value          60 × 32              = 1,920
Write-down     60 × (34 − 32)       =   120

Method: adjusting a count taken on another date

Count taken	Start with	Purchases since	Cost of goods sold since
After the year end	counted value	subtract	add
Before the year end	counted value	add	subtract

Convert sales to cost first: cost = selling price ÷ (1 + mark-up), or cost = selling price × (1 − margin). Goods returned by customers change the adjustment in the opposite direction to sales. Goods returned to suppliers change it in the opposite direction to purchases.

Count after year end. Counted at cost on 4 January: 12,300. Purchases 1–4 January: 2,150. Sales in that period: 3,900 at a 20% margin.

Cost of goods sold    3,900 × 80%   = 3,120
Inventory at 31 December  12,300 − 2,150 + 3,120 = 13,270

Count before year end. Counted at cost on 28 December: 9,860. Purchases 28–31 December: 1,740. Sales in that period: 2,800 at a 25% mark-up.

Cost of goods sold    2,800 ÷ 1.25  = 2,240
Inventory at 31 December  9,860 + 1,740 − 2,240 = 9,360

Other corrections to a draft count. Goods already sold and invoiced: deduct. Goods owned but not counted: add. Counted twice: deduct one count. Damaged or obsolete goods: reduce to NRV if that is lower than cost.

Method: effect of an incorrect valuation

Cost of sales = opening inventory + purchases − closing inventory

If closing inventory is	Cost of sales	Gross profit	Profit for the year	Equity	Inventory asset
Overstated	Understated	Overstated	Overstated	Overstated	Overstated
Understated	Overstated	Understated	Understated	Understated	Understated

Next year: the wrong closing figure is the next year’s opening inventory, so next year’s cost of sales is wrong by the same amount the other way, and gross profit and profit for the year move in the opposite direction to the first year. Equity at the end of the second year is correct, provided the second closing inventory is right. Profit over the two years combined is unchanged.

Worked reminder. Closing inventory is overstated by 800. Gross profit shown is 25,800 when it should be 25,000, and profit for the year shown is 12,800 when it should be 12,000. If the opening inventory of the next year is also 800 too high, that year’s gross profit is 800 too low.

Corrected profit. Corrected profit = draft profit ± the change in closing inventory (an increase in closing inventory increases profit).

Must-know distinctions

• Cost versus NRV: the lower is used, item by item, not in total.
• NRV versus selling price: NRV is selling price after deducting the costs still to pay.
• Mark-up versus margin: mark-up is on cost, margin is on selling price.
• Closing versus opening inventory: an error in closing inventory is in the following year’s opening inventory.
• Profit versus equity: both are wrong at the end of the first year, but at the end of the second year only the profits are wrong, not equity.

Quick self-test

1. Define net realisable value.
2. A unit cost 36. It will sell for 41 with 8 of selling costs. State its value per unit.
3. 25 units cost 12.40 each and have an NRV of 10.60 each. Calculate their value.
4. Item A: 30 units, cost 8, NRV 9. Item B: 20 units, cost 15, NRV 11. Calculate the inventory value item by item.
5. Closing inventory is understated by 1,500. Give the effect on this year’s profit and the effect on next year’s gross profit.
6. A count on 2 January valued inventory at 15,800. Purchases since year end were 2,600 and the cost of goods sold since year end was 2,100. Calculate inventory at 31 December.
7. Sales of 4,500 at selling price. Calculate their cost with (a) a 50% mark-up and (b) a 40% margin.
8. Draft profit is 14,400. Closing inventory was recorded as 8,100 and should be 9,300. State the corrected profit.
9. Why is inventory not valued at expected selling price?
10. A closing inventory error is made in Year 1 only. State the effect on the total profit of the two years combined.

Answers

1. Expected selling price less the costs still to be paid before and when the goods are sold.
2. NRV = 41 − 8 = 33, which is lower than cost, so 33 per unit.
3. 25 × 10.60 = 265 (NRV is lower).
4. A: cost is lower, 30 × 8 = 240. B: NRV is lower, 20 × 11 = 220. Total 460 (comparing totals would wrongly give 490).
5. Profit for the year is understated by 1,500. Next year’s gross profit is overstated by 1,500.
6. 15,800 − 2,600 + 2,100 = 15,300.
7. (a) 4,500 ÷ 1.5 = 3,000; (b) 4,500 × 60% = 2,700.
8. 14,400 + (9,300 − 8,100) = 14,400 + 1,200 = 15,600.
9. A profit is recognised only when goods are sold (realisation), and assets are recorded at historic cost, not at an expected price. Valuing at cost or NRV avoids overstating profit.
10. No effect: the first year’s error is reversed in the second year.

Where marks are usually lost

• Comparing the grand totals of cost and NRV instead of choosing the lower figure for each item.
• Taking selling costs off cost instead of off the selling price.
• Forgetting repair costs when the selling price is the price after repair.
• Valuing at NRV when NRV is higher than cost.
• Adding purchases to a count taken after the year end (they should be subtracted), or the reverse.
• Using sales at selling price in a count adjustment without converting to cost.
• Applying mark-up to selling price, or margin to cost.
• Giving the effect for the first year only and omitting the next year’s opposite effect.
• Writing “overstated” or “understated” without the amount.
• Describing equity as wrong at the end of the second year when it has corrected itself.

Frequently asked questions

What is net realisable value? Net realisable value is the expected selling price less the costs still to be paid before and when the goods are sold, such as repair, repackaging, commission or delivery. Inventory is valued at the lower of cost and net realisable value.

How do you convert sales to cost when adjusting an inventory count? Use cost = selling price ÷ (1 + mark-up), or cost = selling price × (1 − margin). Sales must be converted to cost before they are added to or deducted from a count valued at cost.

How does an incorrect closing inventory affect the next year? The wrong closing figure becomes the next year’s opening inventory, so next year’s cost of sales is wrong by the same amount the other way, and next year’s profit moves in the opposite direction.

Why is inventory not valued at its selling price? Prudence means expected losses are recognised now, while realisation and historic cost mean expected profits are not recognised until the goods are sold. Valuing at the lower of cost and net realisable value applies both ideas.

Official syllabus

Cambridge IGCSE Accounting 0452 syllabus for 2027, 2028 and 2029 (version 1), section 4.5 Valuation of inventory, published by Cambridge International Education (September 2024).