Inventory valuation is governed by which principle?

• A. Lower of cost and net realisable value
• B. Weighted average cost
• C. FIFO
• D. Specific identification method

Answer: (A)

In inventory accounting, you value stock at the lower of its cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business minus any costs to complete the product and to sell it. This rule protects against overstating assets and profits when selling prices fall or costs rise. If the net realisable value is lower than the cost, you write the stock down to NRV and recognise a loss; if NRV is higher than cost, the inventory stays at cost.

The other options describe methods for assigning cost to inventory (how cost is measured or allocated to items) rather than the valuation floor itself. They determine the cost base (for example, FIFO, weighted average, or specific identification) but do not by themselves govern the write-down rule unless NRV is considered.