Learn finance, banking, risk, data science and fintech

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.
Try our courses on Data Science for Finance. JOIN FREE

Leave a Reply

Your email address will not be published. Required fields are marked *

Name *

This site uses Akismet to reduce spam. Learn how your comment data is processed.