Net realizable value in inventory is defined as?

• A. Net realizable value is defined as estimated selling price less reasonably predictable costs of completion and costs to sell.
• B. Net realizable value equals historical cost.
• C. Net realizable value equals fair value.
• D. Net realizable value equals replacement cost.

Answer: (A)

Net realizable value measures the amount you expect to realize from inventory, after considering the costs needed to get the product to a saleable condition and to complete the sale. In practical terms, it’s the estimated selling price in the ordinary course of business minus reasonably predictable costs of completion and costs to sell. This focuses on what the business will actually receive, not what it paid for the item or what it would cost to replace it.

For example, if the item could sell for 100, but it costs 15 to finish and 5 to sell, the net realizable value is 80. This concept is used to prevent overstatement of inventory on the balance sheet; if cost exceeds NRV, a write-down is appropriate.

The other notions don’t fit NRV: historical cost is what was paid for the inventory, not what is expected to be realized; fair value is a current market price for similar assets, not the net of completion and selling costs; replacement cost is the cost to replace the item, which is different from the amount you expect to realize from sale.