How to calculate net realizable value method
The correct answer and explanation is :
Net Realizable Value (NRV) Calculation
The Net Realizable Value (NRV) is a method used in accounting to determine the value of an asset, primarily inventory or accounts receivable, based on the amount expected to be realized after deducting selling and completion costs. It ensures that inventory is not overstated in financial statements.
Formula for Net Realizable Value (NRV):
[
NRV = \text{Selling Price} – \text{Selling Costs} – \text{Completion Costs}
]
Where:
- Selling Price: The expected price at which the asset will be sold.
- Selling Costs: Costs directly associated with selling the asset (e.g., commission, advertising).
- Completion Costs: Any additional costs required to make the asset saleable (e.g., repairs, finishing work).
Example Calculation:
A company has an inventory item with:
- Expected selling price: $500
- Selling costs: $50
- Completion costs: $30
Applying the formula:
[
NRV = 500 – 50 – 30 = 420
]
So, the Net Realizable Value of the inventory is $420.
Why is NRV Important?
- Conservatism Principle: Ensures that assets are not overstated, preventing financial misstatements.
- Compliance with GAAP & IFRS: Used for proper inventory valuation.
- Helps in Decision-Making: Businesses use NRV to assess profitability and manage inventory efficiently.
NRV is commonly applied in inventory valuation, accounts receivable adjustments, and impairment testing to ensure that companies report the most accurate financial picture.
Here is the infographic explaining the Net Realizable Value (NRV) calculation with a step-by-step breakdown.