Here it is in black and white.
How to Calculate Net Realizable Value
The concept of "net realizable value" crops up in two major categories of business bookkeeping: inventories and accounts receivable. Both are classified as current assets, meaning they are assets that a company expects to convert into cash within the next year -- by selling items out of its inventory and by collecting money owed by its customers. Net realizable value, commonly abbreviated NRV, comes into the picture because, under generally accepted accounting principles, businesses must report their inventories at the "lower of cost or market" and their accounts receivable "net of allowance for doubtful accounts." These rules acknowledge the reality that an asset sometimes isn't worth as much as it appears on paper.
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Calculating NRV for Inventories
Step 1
Take a full inventory of goods available for sale to customers.
Step 2
Determine the expected selling price of each item. If you owned a shoe store, for example, and you had a pair of shoes that you believed you could sell for $40, then that would be the expected selling price. If the shoes had a list price of $40 but you believe you'd have to discount them to $30 to sell, that would be the expected price.
Related Reading: How to Calculate the Gross and Net Margins in Excel
Step 3
Determine how much money you will have to spend to get the items ready for sale and to actually sell them. For a shoe retailer, this could mean the cost of sales commissions, packaging or anything else required to get the shoes out the door.
Step 4
Subtract the costs required to prepare the item for sale from the expected selling price. The result is the net realizable value of the item in inventory.
Step 5
Add up the NRV for all items, and the result is the total net realizable value for the company's inventory.
Calculating NRV for Accounts Receivable
Step 1
Add up the total amount owed by customers for goods and services that the company has delivered. Typically, a company adds a debt to accounts receivable only if it has satisfied all conditions to earn the money. So if, say, a shoe store ships an order of 100 pairs of shoes at $40 a pair and bills the customer for payment, then it increases accounts receivable by $4,000. But if the store merely signs an agreement to ship the shoes in three months, and to bill for them at that time, nothing happens to "A/R" until the shoes actually go out the door.
Step 2
Determine the share of total accounts receivable that is likely to go uncollected. Every business arrives at this figure through its own experience. This amount is often called the "allowance for doubtful accounts" or "allowance for uncollectible accounts."
Step 3
Subtract the amount of the doubtful-accounts allowance from the total accounts receivable. The result is the net realizable value of accounts receivable.
