Question

Determine which of the following statements are correct regarding damaged or obsolete goods. (Check all that apply.)

Answer 1

Answer:

1.  Damaged or obsolete goods are not counted in inventory if they cannot be sold.  

2.  If these can be sold… Cost should be reduced to Net Realizable Value

Explanation:

The law relating to the valuation of inventory is that ''inventory should be valued at lower of 'Cost' and 'Net Realizable Value'.

Therefore in the case of damaged or obsolete goods, they have to be eliminated from inventory, otherwise it will lead to overvaluation.

However in the case where these can be sold, They have to be valued at lower of 'cost' or 'salable value', implying that 'Cost' should be reduced to 'Net Realizable Value'