Net Realizable Value

CFA Level I
#1

An analyst gathers the following information (in $ millions) about a manufacturing company’s finished goods inventory at 31 December of Year 1:

Cost of ending inventory 26
Net realizable value 24
Current replacement cost 22
Normal profit margin 1

If the company reports under US GAAP and uses the FIFO inventory valuation method, the carrying amount (in $ millions) of the ending inventory at 31 December of Year 1 is: SOLUTION- 24

But shouldn’t it be lower or COST OR MARKET VALUE? WHICH IS 23

#2

Cost is 26,

Replacement cost is 22, but that’s a red herring in there to confuse you.
You want the cost that was actually paid, which is 26.

Market value is 24.

Normal profit margin is a red herring

#3

Cost is 26
market value is 23
(NRV-NP < Replacement Cost < NRV )
Since Replacement Cost is less than NRV - NP, RC=23