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Inventory at Net Realizable Value

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International and U.S. accounting standards require companies to carry inventory on the balance sheet at the lower of cost or market (LCM).
With LCM an unrealized loss caused by a change that materially disconnects the in the fair market value of current inventory from the most recently reported book value of inventory must be immediately recognized.

This will lower the book value of assets on the balance sheet and reduce profit.
Example: The feature music file sharing device sold by an electronics chain has just become obsolete due to the advances offered by a new device that is not sold by this chain. Regardless of inventory accounting method, the electronics chain must write down its inventory and take a write down charge on its income statement to more accurately reflect true financial position and performance.
Internationally (IFRS-IAS), net realizable value represents the cost to finalize and sell inventory.
In the US (GAAP), market value is generally estimated as the present replacement cost of the inventory.

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LIFO Liquidation

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Financial Reporting Part 1

26 lessons

CFA Level 2: Financial Reporting Part 1 - Introduction

Financial Reporting: Important Definitions

FIFO and LIFO Methods for Inventory Expensing

Inventory Accounting and Financial Statements

Inflation/Deflation and Inventory Accounting Analysis

LIFO – Tax and Cash Flow Note

LIFO Reserve and Converting LIFO Net Income to FIFO Net Income

LIFO Liquidation

Inventory at Net Realizable Value

Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios

Accounting of Long-lived Assets - Expensing vs. Capitalizing

Depreciation Methods for Property, Plant, and Equipment (PPE)

Impact of Depreciation Method

Depreciation - Important Points

Impairment of Long-lived Assets

Impact of Asset Impairment

Revaluation of Property, Plant, & Equipment (PPE)

Leasing versus Purchasing Assets

Traditional Lessee Accounting in US GAAP

Effects of Leases on Selected Financial Reporting Items for Lessees

Lessor Accounting for Leases

Lessors and Sales-Type Capital Leases

Lessors and Direct Financing Capital Leases

Effect of Leases on Financial Statements for Lessors

Future of Lease Accounting

CFA Level 2: Financial Reporting 1 - Recommendations

Topics

Financial Analysis

Financial Statements

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Finance Concepts