What is net realisable value (NRV) and how is it used in inventory valuation?

What is net realisable value (NRV) and how is it used in inventory valuation?

• A. NRV is the estimated selling price less estimated costs of completion and disposal; used to determine LCNRV
• B. NRV is the production cost plus profit
• C. NRV is the current market price for identical items
• D. NRV is the estimated selling price with no deductions

Answer: (D)

Net realisable value is the amount you expect to realise from selling inventory in the ordinary course, after deducting the costs needed to finish making the item and to dispose of it. This figure shows the net proceeds you would actually receive if you sold the stock, not just the headline selling price. In practice, NRV is used in inventory valuation through the LCNRV rule: compare the cost of the inventory with its NRV, and write down the inventory to the lower of the two. For example, if you can sell an item for 100 but you expect to spend 15 to finish it and 5 to dispose of it, NRV is 80. If its cost is higher than 80, you would bring the inventory down to 80. This ensures assets aren’t overstated and reflects the realisable amount. The best description is the one that defines NRV as the estimated selling price minus the estimated costs of completion and disposal, because that's what NRV represents. The other options describe costs or prices that don’t account for the deductions needed to complete and sell the item.

Net realisable value is the amount you expect to realise from selling inventory in the ordinary course, after deducting the costs needed to finish making the item and to dispose of it. This figure shows the net proceeds you would actually receive if you sold the stock, not just the headline selling price.

In practice, NRV is used in inventory valuation through the LCNRV rule: compare the cost of the inventory with its NRV, and write down the inventory to the lower of the two. For example, if you can sell an item for 100 but you expect to spend 15 to finish it and 5 to dispose of it, NRV is 80. If its cost is higher than 80, you would bring the inventory down to 80. This ensures assets aren’t overstated and reflects the realisable amount.

The best description is the one that defines NRV as the estimated selling price minus the estimated costs of completion and disposal, because that's what NRV represents. The other options describe costs or prices that don’t account for the deductions needed to complete and sell the item.