According to the accruals concept, how should inventory be valued?

The accruals concept in accounting emphasizes that expenses and revenues should be recorded in the periods in which they occur, rather than when cash is exchanged. This principle also extends to how inventory is valued for financial reporting purposes.

The correct approach is to value inventory at the lower of cost and net realizable value. This means that inventory is reported on the balance sheet at whichever amount is less: the historical cost of the inventory (which includes purchase price and any directly attributable costs necessary to bring the inventory to its current condition and location for sale) or the net realizable value (which is the estimated selling price in the ordinary course of business minus any expected costs of completion, disposal, and transport).

This method ensures that the financial statements do not overstate the value of inventory. If the value of inventory were to exceed what could realistically be earned from selling it (net realizable value), it would misrepresent the company's financial position. By using the lower of cost or net realizable value for inventory valuation, businesses are adhering to the prudence concept, which aims to prevent overstatement of assets.