Question

Wascana Photography Services sells and services a variety of high-end photography equipment for professional photographers. An inventory count is conducted each year end to verify the information contained in the company’s perpetual inventory system. Once counted, the inventory is valued for the purposes of preparing the financial statements. The following inventory items represent a cross-section of Wascana’s inventory for the year ended June 30, 2020. Because computerized records are maintained and a specific identification method of inventory is applied, the historical cost of each inventory item can easily be determined.

In addition to the historical cost, the store management has included information detailing net realizable value for each item.

Item		Quantity on hand June 30, 2020		Historical cost (per unit)			Net realizable value (per unit)
Nikon D3100 body		4		$400			$350
Nikon 5200 with zoom lens		2		$1,500			$1,600
Nikon 80-200 mm/2.8 lens		2		$1,100			$1,150
Canon EOS 60 body		2		$1,600			$1,900
Canon EF 24-70 mm/2.8 zoom lens		1		$2,500			$2,300
Olympus E5 body		3		$1,900			$1,700
Pentax K3 body		6		$1,050			$1,300

Aleksander Dudyk, the manager of Wascana, is confused about why there is a difference between historical cost and net realizable value. Aleksander is not an accountant and is unfamiliar with these terms. He is also wondering which number should be used to value the company’s inventory on June 30, 2020.

For the purposes of this case, assume that the above items represent the total inventory of Wascana Photography Services on June 30, 2020.

Explain the meaning of historical cost and net realizable value in the context of inventory valuation for Aleksander.

Answer 1

Historical cost is the cost at which the inventory has been originally purchased and recorded in the books.

The net realizable value is the market value or the expected selling price of the inventory less the costs required to dispose the inventory.

The inventory is valued at its historical cost. However, if the net realizable value of the inventory is lower than the historical cost, then the inventory is valued at its net realizable value. Thus, the inventory is valued at the lower of its historical cost or net realizable value.

Item	Quantity	Historical Cost (per unit)	Net Realizable Value (per unit)	Lower of Cost or NRV	Total Inventory
Nikon D3100 body	4	400	350	350	1400
Nikon 5200 with zoom lens	2	1500	1600	1500	3000
Nikon 80-200 mm/2.8 lens	2	1100	1150	1100	2200
Canon EOS 60 body	2	1600	1900	1600	3200
Canon EF 24-70 mm/2.8 zoom lens	1	2500	2300	2300	2300
Olympus E5 body	3	1900	1700	1700	5100
Pentax K3 body	6	1050	1300	1050	6300
Total $					23500

Inventory value on June 30, 2020: $23500