IAS 2 Inventories gives entities a choice between the FIFO and weighted average cost formulas, and requires every inventory balance to be tested against net realisable value before it is reported. Working through that arithmetic by hand for a worked example is a good way to see exactly how the rules covered in Parts 1 and 2 of this series fit together. This is Part 3 of a three-part series on IAS 2 — a free, interactive calculator that applies FIFO, weighted average, and the lower-of-cost-and-net-realisable-value test to numbers you enter yourself.

How the Calculator Works

The calculator treats your opening inventory and each purchase as a separate cost “lot.” Under FIFO, units sold are deemed to come from the oldest lots first, so the calculator works through the opening balance, then Purchase 1, then Purchase 2, until the units sold are fully accounted for — whatever is left becomes ending inventory, valued at the cost of the most recently acquired lots. Under weighted average, all units — opening balance and both purchases — are pooled into a single average cost per unit, which is then applied to both cost of goods sold and ending inventory.

Net realisable value is calculated as your estimated selling price per unit, less estimated costs to complete and estimated costs to sell, exactly as described in Part 2. The calculator then compares each method’s ending inventory cost per unit to that net realisable value: if cost is higher, it calculates the write-down needed to bring ending inventory down to net realisable value, consistent with the lower-of-cost-and-net-realisable-value rule in IAS 2.

Inventory Costing & NRV Calculator

Enter an opening inventory balance, up to two purchase lots, and the units sold during the period, along with your estimated selling price and completion/selling costs. The calculator instantly computes cost of goods sold and ending inventory under both FIFO and weighted average, then applies the lower-of-cost-and-net-realisable-value test to each.