Lower of Cost or Net Realizable Value
Definition
The accounting rule that inventory must be valued at its cost or the amount you can realistically sell it for minus selling costs, whichever is lower.
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Formula
Net Realizable Value = Expected Selling Price − Costs to Complete and SellThis rule stops the balance sheet from carrying inventory at more than it is worth. It comes up with discontinued products, heavy discounting and products whose selling fees rose.
Apply it product by product at least yearly. Watch for: SKUs routinely sold below cost plus fees, which signals inventory that should already be written down.
Example
A unit cost $15. It can now sell for only $14, with $3 of fees and shipping, so its NRV is $11 and it should be valued at $11, not $15.