What does 'net realizable value' mean in the context of inventory?

Net realizable value (NRV) is a key concept in the assessment of inventory, particularly under the lower of cost or net realizable value rule in accounting. It refers to the amount that an entity expects to realize from the sale of inventory in the ordinary course of business, after subtracting any costs that are necessary to make the sale.

The correct understanding of NRV involves recognizing that it is the selling price expected to be received from inventory, minus any costs that are directly attributable to the sale of that inventory, such as completion costs, costs of marketing, and selling expenses. This calculation is crucial for ensuring that inventory is stated at an amount that is not higher than its actual recoverable amount, which helps in presenting a fair view of an entity's financial position.

Other options do not align with the definition of NRV:

• The current book value of the inventory does not account for potential selling costs or changes in market conditions, hence it doesn't reflect the realizable amount from sales.
• The replacement cost of inventory refers to the cost of acquiring or producing the same inventory again and does not take into consideration the expected selling price or sale costs.
• Estimated depreciation pertains to the allocation of cost of an asset over its useful life, and is