This tool determines the estimated selling price of an asset in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. As an example, consider inventory with an estimated selling price of $100. If it requires $10 to complete and $5 to sell, the calculated value is $85 ($100 – $10 – $5). This figure represents the net amount a company expects to realize from the sale of the inventory.
Such a calculation is crucial for financial reporting and inventory management. It helps businesses adhere to accounting principles that require assets to be valued conservatively. Utilizing this metric ensures that financial statements accurately reflect the true economic value of assets, preventing overstatement and providing a more realistic view of a company’s financial position. This has been a standard practice for a long time to prevent misleading inflated asset values.
