Lecture on Lower of Cost or Market Rule and Net Realizable Value

Overview

• Discussion on inventory valuation using the lower of cost or market rule.
• Calculation of market price involves choosing the middle value among:
  • Replacement cost
  • Net realizable value (NRV)
  • Net realizable value minus a normal profit
• Inventory is valued at the lower number between market value and original cost.

Net Realizable Value (NRV)

• Definition: Expected sales price minus costs necessary to complete the sale.
• Components:
  • Expected sales price per unit
  • Costs to complete the sale, e.g., sales commissions, packaging costs.

Example Calculation

1. Scenario:

   • 100 units of inventory
   • Expected selling price: $25 per unit

2. Costs to Complete the Sale:

   • Commission: $7 per unit
   • Packaging costs: $1 per unit

3. Net Realizable Value Calculation:

   • Per unit NRV: $25 (expected price) - $7 (commission) - $1 (packaging) = $17
   • Total NRV for 100 units: $17 per unit * 100 units = $1700

4. Conclusion:

   • Total net realizable value of the inventory is $1700.*

Key Takeaways

• NRV helps in determining the more realistic inventory value after accounting for costs to complete a sale.
• Helps businesses in making informed decisions regarding inventory pricing and valuation for accounting purposes.