ACCA Financial Reporting (F7) Practice Exam 2026 – Complete Prep Guide

When valuing inventories, the primary aspects that are considered include the cost of purchase, conversion costs, and other costs incurred to prepare inventories for sale. This approach aligns with the fundamental principles of inventory valuation outlined in accounting standards.

The cost of purchase refers to the expenditure incurred to acquire inventory items, which encompasses the purchase price, import duties and transport costs directly attributable to bringing the inventory to its present location and condition. Conversion costs relate to the manufacturing costs that are necessary to transform raw materials into finished goods, including labor and overhead expenses.

Additionally, other costs to prepare inventories may cover costs directly associated with bringing the inventories to a saleable condition, like packaging and handling costs. This comprehensive view ensures that the valuation reflects all relevant expenses that contribute to the overall cost of inventory, thus providing accurate financial reporting and assessment of profit margins when sales occur.

Considering alternative aspects, such as marketing expenses, retail prices, and competitor pricing, does not directly impact the valuation of inventory on the balance sheet, although they may influence pricing strategies and future business decisions. Therefore, the most accurate and relevant considerations for inventory valuation focus on the actual costs incurred to obtain and prepare the goods for sale, as captured in the selected answer.