Value inventory using net realisable value
Explain why inventory valuation is difficult and apply the net realisable value method to damaged, obsolete or unsold items.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 10.1.3. Ratio calculations use the formulae listed in the relevant Cambridge syllabus. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Read the figures, dates and assumptions supplied in the question before calculating or interpreting an accounting result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is net realisable value estimated?
What you will learn
- Explain why physical condition, demand and cost estimates complicate valuation
- Calculate net realisable value from selling price and completion/disposal costs
- Explain how a write-down can affect inventory and reported profit
Inventory value depends on estimates
Inventory may be incomplete, damaged, perishable or obsolete; items can be difficult to count, and the selling price or completion cost may be uncertain. Different products and changing demand make one estimate unsuitable for every item.
Net realisable value (NRV) is the estimated selling price less the costs needed to complete and sell or dispose of the item. It estimates the net amount expected from realisation, rather than simply repeating the original purchase cost.
Compare NRV with cost
Under the net realisable value approach, inventory is not kept above the amount expected to be realised: where NRV is below cost, a write-down recognises the lower recoverable amount. A write-down reduces closing inventory and usually increases the period's cost of sales/expense, lowering profit, other things equal.
Use only the estimates and valuation basis given in a question. Explain why the estimate may change and avoid treating NRV as the selling price before costs. The syllabus does not require a catalogue of inventory-costing formulas such as FIFO or LIFO.
Pause and explain
An item may sell for $80 and needs $12 of completion and selling costs. What is its NRV?
Worked example
A batch cost $12,000. Its estimated selling price is $10,500 and the remaining finishing and selling costs are $1,400. Find NRV and the write-down needed if the inventory is carried at cost.
Show the worked solution
- NRV = estimated selling price−completion and selling costs.
- NRV = 10,500−1,400=$9,100.
- Compare with cost: $12,000−$9,100=$2,900 write-down.
Answer NRV is $9,100. Because this is below the $12,000 cost, the inventory is written down by $2,900 to $9,100.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A damaged item has a cost of $750, an expected selling price of $620 and repair/selling costs of $70. Calculate its NRV and write-down from cost.
Give me a hint
Deduct the remaining costs, then compare NRV with cost.
Compare my reasoning
- NRV = 620−70.
- Compare $550 with the $750 cost.
- The difference is the required write-down when NRV is below cost.
NRV is $550 and the write-down is $200.
Look for these in your work
- NRV is calculated after costs
- Cost is compared with NRV
- Write-down amount is correct
A manager values every item at its catalogue price even though some are obsolete and costly to dispose of. Explain why that may overstate inventory.
Give me a hint
Consider realistic saleability and the net cash expected after disposal costs.
Compare my reasoning
- Obsolete items may not sell at catalogue prices.
- A discount or disposal cost can lower the net amount realised.
- The estimate should reflect item condition and evidence, then be reviewed.
The catalogue price may be unrealistic for obsolete stock, and disposal or selling costs reduce the amount realised. A condition-based NRV estimate may therefore be lower; using the catalogue price could overstate current assets and profit if a write-down is required.
Look for these in your work
- Demand/condition issue is identified
- Net costs are considered
- Impact on accounts is explained
Inventory cost is $18,000 and NRV is $20,000. What value is supported by the NRV approach, and why?
Give me a hint
An estimate above cost does not create an upward revaluation under this approach.
Compare my reasoning
- Compare $20,000 with the recorded $18,000 cost.
- There is no shortfall below cost to write down.
- Do not record the estimated extra $2,000 as inventory profit.
Keep the inventory at $18,000 under the lower-of-cost-and-NRV approach. NRV exceeds cost, so it does not justify increasing the carrying amount to $20,000 or recognising an unrealised gain.
Look for these in your work
- Correct value is selected
- No unsupported uplift is recorded
- Reason is tied to the valuation approach
Common mistakes
- Using the selling price without deducting remaining costs
- Writing inventory up above its cost based only on a higher selling estimate
- Claiming every estimate is exact
What can you explain now?
How is net realisable value estimated?
Compare with the explanation
Expected selling price less costs to complete and sell
The estimate is the net amount expected from realising the item.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
How do expected selling price, completion costs, selling costs and cost determine an inventory write-down?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.