IGCSE Accounting: Valuation of inventory (Cambridge 0452)

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.

This study guide covers section 4.5 Valuation of inventory of the Cambridge IGCSE Accounting 0452 syllabus for exams in 2027, 2028 and 2029 (version 1). The official text lists three points, and the syllabus says that questions on both papers can draw on any of the subject content, so inventory valuation can be tested in either. Amounts are in dollars ($). The wider topic is in Accounting Procedures, which has its own worked inventory example; the examples here use different businesses and figures. Condensed notes are in the revision notes and exam-style questions are in the practice set. See also the Cambridge IGCSE Accounting hub, the printable checklist and the free diagnostics.

What 4.5 asks for

Official point	Where it is covered
the valuation of inventory at the lower of cost and net realisable value	sections 1 and 2
how to calculate the value of inventory	sections 2 and 3
the effect of an incorrect valuation of inventory on gross profit, profit for the year, equity and asset valuation	sections 4 and 5

1. The rule: lower of cost and net realisable value

Cost is what the business paid for the units. In a question it is given as a cost per unit.

Net realisable value (NRV) is the amount the business expects to receive when it sells the goods, less any costs still to be paid before the sale is complete. Typical deductions are repairs, repackaging, commission to a sales agent and delivery to the customer.

Net realisable value per unit = expected selling price
                                − costs still to be paid

The value of each item of inventory is whichever is lower, cost or NRV. There are two reasons.

• Prudence (section 7.1): a loss that is expected is recognised as soon as it is foreseen, so the cost of unsellable goods is charged to the year in which they lose value.
• Realisation and historic cost (section 7.1): a profit is recognised only when the goods are sold, so inventory is never shown above what it cost, even when it could be sold for more.

If NRV is higher than cost, cost is used. If NRV is lower, NRV is used and the difference is a reduction in the closing inventory figure.

2. Calculating the value of inventory, item by item

Compare cost and NRV for each item (or each group of identical items) and multiply the lower figure by the number of units.

Worked example 1. Marisol Pendleton owns Beresford Cycles. At 31 December 2028 the inventory count gave these figures (dollars):

Item	Units	Cost per unit	Selling price	Costs still to pay	NRV per unit	Lower	Value
Helmets	30	22	35	4 commission	31	22 (cost)	660
Child bike K	12	140	150 after repair	25 repair + 10 commission	115	115 (NRV)	1,380
Pumps	50	9	12	1 commission	11	9 (cost)	450
Frames	8	310	340	45 delivery	295	295 (NRV)	2,360
Closing inventory							4,850

Total cost is 5,270 and total NRV is 5,220. Comparing the two totals would give 5,220, but that lets the extra value in the helmets and pumps hide the losses on child bike K and the frames. Item by item, closing inventory is 4,850, which is 370 lower. Section 4.5 does not list methods such as FIFO or average cost for choosing a unit cost, so a question will give you the cost per unit.

3. Adjusting a count taken on another date

A business does not always count its inventory on the last day of the year. If the count is on another date, start from the counted value at cost and move it to the year-end date using the transactions in between. Sales are recorded at selling price, so convert them to cost first (using the mark-up or margin the question gives). Mark-up is profit expressed as a percentage of cost. Margin is profit expressed as a percentage of selling price.

Count after the year end: take off purchases made since year end, add back the cost of goods sold since year end, and adjust for returns.

Worked example 2. Imara Sandrine’s year end at Ravenscroft Kitchenware is 31 December 2028. She counted inventory on 5 January 2029 and valued it at cost at 23,640. Between 1 and 5 January:

• purchases of 3,150 were received into inventory
• goods costing 420 were returned to a supplier
• sales were 5,320 at selling price, and the gross profit margin is 30%
• customers returned goods with a selling price of 350

Cost of goods sold      5,320 × 70%                = 3,724
Cost of goods returned    350 × 70%                =   245
Count on 5 January                                   23,640
Less purchases received                              (3,150)
Add goods returned to supplier (left before count)      420
Add cost of goods sold                                3,724
Less goods returned by customers (back in the count)   (245)
Inventory at 31 December 2028                        24,389

Count before the year end: do the reverse. Add purchases made after the count, and subtract the cost of goods sold after the count.

Correcting a draft inventory figure. Questions often list problems with the first count. Work through them one at a time.

Worked example 3. Soraya Danforth’s draft closing inventory at Danforth Garden Supplies was 41,820 at cost.

1. Goods costing 2,150 were invoiced to a customer on 30 December but were still in the warehouse at the count. The sale is recorded, so the goods are deducted.
2. Damaged goods costing 1,800 were counted at cost. They can be sold for 1,300 with selling costs of 150, so NRV is 1,150 and the reduction is 650.
3. Goods costing 960 arrived on 30 December and were not counted. They are added.

Corrected closing inventory is 41,820 − 2,150 − 650 + 960 = 39,980.

4. The effect of an incorrect valuation

Closing inventory is subtracted in the calculation of cost of sales and is shown as a current asset:

Cost of sales = opening inventory + purchases − closing inventory

If closing inventory is understated, cost of sales is overstated, so gross profit and profit for the year are understated by the same amount. Equity (capital) rises by the profit for the year, so equity is understated, and the inventory figure in current assets is understated. An overstatement has the opposite effect on every figure.

The error does not stay in one year. Closing inventory becomes the next year’s opening inventory, so in the next year the effects on cost of sales, on gross profit and on profit for the year are reversed.

5. Worked example: an understatement over two years

Yusra Ellsworth sells audio equipment. At the end of Year 1 a batch of goods costing 3,000 in a storeroom was not counted, so closing inventory was recorded as 15,000 instead of 18,000. Year 2 closing inventory (20,000) was correct. Opening capital was 60,000 and drawings were 12,000 in Year 1 and 13,000 in Year 2.

($)	Year 1 recorded	Year 1 correct	Year 2 recorded	Year 2 correct
Revenue	150,000	150,000	165,000	165,000
Opening inventory	14,000	14,000	15,000	18,000
Purchases	96,000	96,000	104,000	104,000
Closing inventory	(15,000)	(18,000)	(20,000)	(20,000)
Cost of sales	95,000	92,000	99,000	102,000
Gross profit	55,000	58,000	66,000	63,000
Expenses	38,000	38,000	41,000	41,000
Profit for the year	17,000	20,000	25,000	22,000
Equity at year end	65,000	68,000	77,000	77,000

In Year 1, gross profit, profit for the year, equity and the inventory asset were each understated by 3,000. In Year 2, gross profit and profit for the year were overstated by 3,000. Equity at the end of Year 2 is correct, because the two profit errors cancel, and so is the Year 2 inventory asset. Total profit over the two years is 42,000 either way. The error moves profit between years and gives a misleading comparison of results (see Analysis and Interpretation).

The same logic applies if inventory was overstated: for example, goods still valued at cost when their NRV was lower. Gross profit, profit for the year, equity and the inventory asset are all too high, and the next year’s profit is too low.

Common errors

• Comparing total cost with total NRV instead of working item by item.
• Deducting selling costs from cost instead of from the selling price.
• Using NRV when it is higher than cost.
• Forgetting that a repair cost is deducted in finding NRV when the selling price quoted is the price after repair.
• Using the selling price of goods sold in a count-date adjustment without converting to cost.
• Confusing a mark-up, which is based on cost, with a margin, which is based on selling price.
• Stating the effect on the first year only and leaving out the opposite effect in the second year.
• Saying equity is affected in the second year: it is corrected, because the two years’ profit errors cancel.

Next steps

Use the revision notes, then the practice questions. The Accounting Procedures practice set mixes inventory with the other Topic 4 procedures, and Preparation of Financial Statements shows where closing inventory sits in full statements.

Frequently asked questions

Why must cost and net realisable value be compared item by item? Comparing the totals lets the extra value in some items hide the loss on others. Comparing each item, or group of identical items, and taking the lower figure means every expected loss is recognised.

How do you adjust an inventory count taken after the year end? Start from the counted value at cost, take off purchases received since the year end, add back the cost of goods sold since the year end, and adjust for returns. For a count before the year end, do the reverse.

What happens to profit if closing inventory is understated? Cost of sales is overstated, so gross profit and profit for the year are understated by the same amount, and the inventory asset and equity are understated too. In the next year the effects reverse, because the understated figure becomes opening inventory.

Which accounting concepts explain the inventory valuation rule in Cambridge IGCSE Accounting 0452? Prudence, because an expected loss is recognised as soon as it is foreseen, and realisation, because profit is not recognised until goods are sold. Together they give the rule of the lower of cost and net realisable value.

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).