As against the cost, the net realizable value is based on estimates which are made as per following rules:

(i)    Inventory held in the ordinary course of business: Estimates of net realizable value are made on the basis of most reliable evidence of the events affecting the market price occurring after the balance sheet date.

(ii)    Inventories held under a contract: If the inventories are held on balance sheet by virtue of a contract, the net realizable value would be based on contract price. If the sales contracts are for less than the stock in hand, the net realizable value of the excess inventory is based on general selling prices. Contingent losses are dealt with the principles laid down in Accounting Standard – 4: Contingencies and Events Occurring After the Balance Sheet Date.

(iii)    Material and other supplies to be used in the production of finished goods are not written down below cost if the finished products are expected to be sold at or above cost.

(iv)    When there has been decline in the price of materials and it is estimated that cost of the finished products in which such materials are used will exceed net realizable value, the materials are written down to realizable value, In such cases replacement cost may be the best available measure of their net realizable value.

For more help in Estimation of Net Realizable Value click the button below to submit your homework assignment