The inventories account on the balance sheet reports merchandise held for sale, or supplies used in the manufacture of products to be sold in the normal course of business. Inventory is recognized whenever a company acquires merchandise or material, transforms material into products. Inventory is derecognized whenever the company sells the merchandise or products.
A manufacturing firm usually carries three classes of inventory: raw materials, work in progress and finished goods. A retail company normally lists only merchandise purchased to be resold to the public, while a service company usually has little or no inventory.
| Beginning Inventories → | Cost of Goods Sold → | Ending Inventories |
| Balance Sheet | Income Statement | Balance Sheet |
Inventories are shown on the balance sheet at the lower of their cost or market value. Whereas the term “market” is frequently interpreted in the US, Germany and the Netherlands to mean replacement cost, IFRS requires “market” to mean net realizable value (NRV), which is the estimated selling price of inventory in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.
| Net Realizable Value of Inventories – US GAAP vs. IFRS | |
| US GAAP | IFRS |
| Market value is the current replacement cost of inventory, with the net realizable value serving as the ceiling and net realizable value less a normal profit margin serving as the floor. | Net realizable value equals the estimated selling price of inventory less the estimated costs of completion and sale of the item. |
| Reversal of inventory write-downs and their recognition in income is prohibited, unless the subsequent recovery in value relates to changes in exchange rates. | Reversal of inventory write-downs and their recognition in income is allowed if the net realisable value of the item subsequently increases. |