If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and net earnings on the statement of earnings will be reduced.

Question

Quizplus · Accepted Answer

Net realizable value is the estimated selling price of the inventory minus the estimated cost of completion and disposal. If it is lower than the cost, it means the inventory is not worth what the company paid for it and therefore it must be written down to its net realizable value. This will reduce the value of total assets on the statement of financial position and also decrease net earnings on the statement of earnings due to the recognition of a loss.

If Net Realizable Value of the Inventory Is Lower Than