Watch here video on accounting principles covering Net Realizable Value concept.
When we explore inventory, which is sold by the entity, most of the items will usually be sold for the price, which is higher than acquisition or manufacturing cost. However due to different reasons sales price might be lower than acquisition or manufacturing cost. These reasons are:
Damage
Obsolescence
Technological change
Market change
In this case when sales price of inventory is lower that manufacturing or acquisition cost, such items must be valued in the Balance Sheet at Net Realizable Value.
Net Realizable Value is an estimated proceeds from sales reduced by:
cost to prepare inventory for sale
cost of marketing, distribution, selling, which is directly related to the inventory item
Watch Accounting Principles - Net Realizable Value video below:
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