Inventory at Net Realizable Value
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.
- 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