There are several methods which in theory might be used for the valuation of stock items.
- Stocks might be valued at their historical cost – The cost at which they were originally bought.
- Stock might be valued at net realizable value – Valued at their selling price less any costs still to be incurred in getting them ready for sale and then selling them.
- Stock might be valued at their expected selling price – The use of selling prices in stock valuation is ruled out because this would create a profit for the business before the stock has been sold.
- Stock might be valued at the amount it would cost to replace them – This amount is referred to as the current replacement cost of stocks.
The argument developed above suggests that the rule to follow is that stocks should be valued at cost, or if lower, net realizable value. The accounting treatment of stock is governed by an accounting standard that stats stock should be valued at the lower of cost and net realizable value.