Inventory related question

[viciam]

Evening all.

If a company holds inventory of a natural resource on its balance sheet, be it oil, lithium, uranium, steel or whatever and it mentions in the annual report that the company records the value either at cost or market value whichever is lower, would this mean that if the natural resource cost $30 to produce or purchase but the market value is $40, it would be recorded as $30?

So what would happen if the market value of the natural resource shoots up from $40 to $100? Would it still show up as $30 on the balance sheet but in reality it would be worth $100?

And this would be a good thing right? A price shoot up of the natural resource could in this situation instantly turn the fortunes of a struggling company around?

Thanks in advance

 

[skc]

Evening all.

If a company holds inventory of a natural resource on its balance sheet, be it oil, lithium, uranium, steel or whatever and it mentions in the annual report that the company records the value either at cost or market value whichever is lower, would this mean that if the natural resource cost $30 to produce or purchase but the market value is $40, it would be recorded as $30?

So what would happen if the market value of the natural resource shoots up from $40 to $100? Would it still show up as $30 on the balance sheet but in reality it would be worth $100?

And this would be a good thing right? A price shoot up of the natural resource could in this situation instantly turn the fortunes of a struggling company around?

Thanks in advance

Yes. General principle of accouting means that you record things in a conservative manner - so use the lower of cost or realisable value. And yes if the market price of the inventory went up, the company stands to gain. It will show up in the P&L when the company sells the inventory.

The same thing goes with land and building on balance sheets. Often they appear "at cost" even though they could have been purchased years ago, with current market value many times the book value. Some entities however (e.g. property trust) can re-value their properties with the change in value recorded in the P&L, and the new valuation booked into the balance sheet.