Legal Definitions - net realizable value

Net Realizable Value refers to the estimated amount of cash or value a company expects to receive from the sale or collection of an asset, after deducting any costs necessary to complete the asset and sell it, or to collect the payment. It represents the realistic net amount a business anticipates realizing from an asset.

• Example 1: Accounts Receivable

  A small marketing agency has outstanding invoices totaling $50,000 from various clients. Based on past experience, the agency estimates that about 3% of these invoices will likely never be collected due to client financial difficulties or disputes.

  In this scenario, the net realizable value of the agency's accounts receivable is $48,500 ($50,000 total receivables - $1,500 estimated uncollectible amount). This figure represents the actual cash amount the agency realistically expects to receive from its current customer balances.

• Example 2: Inventory

  A clothing retailer has a batch of winter coats that didn't sell well during the season. The original selling price was $150 per coat. To clear this inventory, the retailer plans a clearance sale where the coats will be priced at $80 each. Additionally, each coat requires a $5 dry-cleaning cost before it can be sold, and the sales commission for each coat is $3.

  For each coat, the net realizable value is $80 (expected selling price) - $5 (dry-cleaning cost) - $3 (sales commission) = $72. This is the net amount the retailer expects to realize from selling each coat after accounting for the necessary preparation and selling expenses.

• Example 3: By-products in Manufacturing

  A sawmill processes logs into lumber. A significant byproduct of this operation is sawdust. Instead of disposing of it, the sawmill sells the sawdust to a local landscaping company for $20 per cubic yard. However, it costs the sawmill $5 per cubic yard to collect, bag, and load the sawdust for transport.

  The net realizable value of the sawdust is $15 per cubic yard ($20 selling price - $5 collection and loading costs). This value is then typically used in accounting to reduce the overall cost of producing the primary product (lumber), as the sale of the byproduct contributes to the company's revenue.