What is net realizable value?

• A. Estimated selling price plus costs to complete and sell.
• B. Estimated selling price minus selling expenses.
• C. Estimated selling price minus costs to complete and sell.
• D. Cost of goods sold plus selling costs.

Answer: (C)

Net realizable value is the amount a company expects to realize from selling inventory, after accounting for the costs to complete the product and to sell it. In other words, take the estimated selling price and subtract the costs needed to finish making the product and any selling expenses. That net amount represents the value of the inventory in terms of what will actually be realized from its sale.

For example, if you expect to sell an item for $1,000 and you estimate $100 to finish it plus $50 to market and sell it, the net realizable value is $1,000 − ($100 + $50) = $850.

This concept is used to compare against cost to determine if the value of inventory should be written down. Subtracting only selling expenses ignores costs to complete, and adding costs to the price would overstate the amount realized. Mixing in cost of goods sold with selling costs isn’t NRV.