Market value in inventory valuation is based on what people are willing to pay, the lower-of-cost-or-market basis is used to value inventory items, and Net realizable value ensures inventory is not overvalued.
Market value: Market value in valuing inventory is defined as the price a person is willing to pay for a specific product or service based on demand and supply dynamics, not the cost of production. This valuation principle is crucial in determining the value of inventory items for financial reporting purposes.
Lower-of-cost-or-market basis: Under this method, inventory is valued at the lower of its cost or the current market value. If the market value of the inventory falls below its cost due to factors like perishability, obsolescence, or shifts in demand and supply, the market value is used for valuation.
Net realizable value (NRV): NRV is another key concept in inventory valuation, representing the estimated selling price of the inventory less any anticipated costs of completion and disposal. It is used to ensure that inventory is not carried at a value greater than the benefits it can provide.
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