Example of Net Realizable Value

Example of Net Realizable Value

The inventory is to be valued at lower of cost or net releasable because under the prudence concept assets are not to be overstated. The net realizable value is the expected selling price less cost necessary to make the sale.

Example # 1

The ABC & Company has some cloths in stores which are purchase price is $ 200 but these cloth can only be sold $ 150. Further a $ 80 rupees special material is required for cloth to clean the dust. The management of ABS is of the view that without this material use the cloth will look dirty and will not attract customer.

Solution

1.      Step Calculate Net realizable value

2.      Compare cost and Net realizable value

1. Calculate Net Realizable value

Selling Price	$200
Less: Cost necessary to make sale	$ 80
Net Realizable value	$ 120

2. Compare the cost and Net Realizable Value

Cost	Net Realizable value	Inventory Valuation
$ 150	$ 120	$ 120 (lower of cost or Net realizable value