Final answer:
Net Realizable Value (NRV) is an inventory accounting term that estimates the selling price minus costs of completion and sale, while NRV-NP further subtracts a normal profit margin for a more conservative inventory value.
Step-by-step explanation:
In the context of inventory accounting, the term Net Realizable Value (NRV) refers to the estimated selling price of goods, minus the sum of the cost of completion and the cost required to make the sale. This concept is part of the lower of cost or market rule, which guides how inventory is reported on the balance sheet. The equation for NRV is:
NRV = Estimated Selling Price - (Cost of Completion + Cost of Sales)
Following the NRV, is the notion of NRV less a normal profit margin (NRV-NP), which is used to provide a more conservative estimate of the value of inventory. It considers what the inventory is worth if it were sold, minus a reasonable profit margin. The equation for NRV-NP is:
NRV-NP = NRV - Normal Profit Margin
It's important to apply these concepts correctly to ensure that inventory is not overstated on financial statements.