Question

For purposes of accounting for inventory, net realizable value is defined as:

A) Estimated selling price.
B) Estimated selling price less expected returns by customers.
C) Estimated selling price less any costs of completion, disposal, and transportation.
D) Estimated cost to replace the inventory.

Answer 1

The net realizable value for inventory accounting is the estimated selling price minus completion, disposal, and transportation costs. It is part of conservative inventory valuation and reflects the asset's potential selling price.

Step-by-step explanation:

The net realizable value (NRV) in accounting for inventory is defined as the estimated selling price of the inventory goods less any costs of completion, disposal, and transportation. This valuation ensures that the inventory is not shown at an amount greater than the amounts expected to be realized from its sale. It reflects a conservative approach to inventory valuation that takes into account potential reductions in value due to various factors that affect the final selling price.

Inventory is an asset that represents goods that have been produced but have not yet been sold. These goods are held by a business in anticipation of sale, and are recorded on the balance sheet at the lower of cost or NRV to account for any potential loss in value. NRV is closely linked to the recession and peak of business cycles, as the estimation of NRV can be influenced by the performance of the business and the economy as a whole. Changes in NRV might indirectly reflect broader economic indicators such as national income, net national product (NNP), and the overall standard of living.