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).
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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.
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This will lower the book value of assets on the balance sheet and reduce profit.
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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.
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Internationally (IFRS-IAS), net realizable value represents the cost to finalize and sell inventory.
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In the US (GAAP), market value is generally estimated as the present replacement cost of the inventory.