How is net realisable value calculated?

Net realisable value (NRV) is a key concept in accounting that represents the estimated amount that can be obtained from the sale of an asset, minus any costs that are necessary to make the sale. The correct calculation involves taking the estimated selling price of the inventory and subtracting any costs linked to its sale, such as selling and distribution costs. This approach ensures that the inventory is reported on the balance sheet at a value that reflects its true economic potential, considering the costs that will be incurred in the selling process.

Option B succinctly captures this process by highlighting the estimated selling price and the necessary deductions for selling and distribution costs. This measure is particularly important for accurate financial reporting and valuation of inventory, as it aligns the valuation with the potential cash flows that can be realized from the sale of stock.

Other options do not accurately reflect the calculation of NRV. For instance, simply adding selling expenses to the cost price does not account for the actual net return after expenses are deducted. Similarly, using the market price of stock or the original purchase price does not factor in the revenue-generating aspects or associated costs for selling the inventory, which are critical for determining NRV.