What does net realizable value represent?

Net realizable value (NRV) represents the estimated selling price of an asset, such as inventory, minus any costs that are expected to be incurred to complete the asset and sell it. This measure provides a more accurate reflection of what the business expects to receive from selling the asset, rather than just its historical cost.

For inventory, determining NRV is essential for ensuring that the inventory is reported on the balance sheet at the amount that can realistically be converted into cash. It accounts for potential selling expenses and other costs that might reduce the amount realized from the sale, thereby giving a clearer picture of the asset’s recoverable value.

In contrast, other options do not encapsulate the correct definition of net realizable value. For instance, merely stating the cost of inventory does not consider the selling aspect, and simply reporting the value of inventory on the balance sheet fails to address the expected future cash flows associated with that inventory. Moreover, total sales revenue reflects gross income without accounting for costs associated with selling, which is not aligned with the NRV concept. Therefore, defining NRV as the estimated selling price minus costs to complete provides the most accurate understanding of the value that can be realized from the inventory.