Net Realizable Value (NRV)
What it is:
How it works/Example:
Let's assume Company XYZ needs to get rid of a widget maker. It expects to sell the asset for $10,000. It must pay a broker $600 for help in the sale, $50 in legal paperwork costs and $200 to deliver the asset to the buyer. Thus, Company XYZ's net realizable value on the asset is:
$10,000 - $600 - $50 - $200 = $9,150
Analysts sometimes incorporate the future cash inflows associated with the assets and calculate the present value of the cash inflows and outflows in order to determine NRV.
Why it matters:
NRV is utilized when using the lower of cost or market (LCM) method of inventory accounting. It is also used when trying to calculate how much of a company's accounts receivables are truly expected to turn into cash (that is, when determining bad debt expense).