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Comparative Analysis of Net Realizable Value and Replacement Costing.

Norton M. Bedford¹; James C. McKeown²

¹ Professor of Accountancy and Business Administration, University of Illinois, Urbana-Champaign. 1 · ² Assistant Professor of Accountancy, University of Illinois, Urbana-Champaign. 2

This article presents information on financial accounting. The net realizable value of an asset is defined as the maximum net amount, which can be realized from the disposal of that asset within a short period of time. Net amount is defined as the selling price less disposition costs including tax effects discounted to the point of measurement. Basically, the issue is whether or not society is better served by the valuation of assets for public reporting at the cash they command upon sale or at the cash required to have them available for use by the firm. It might appear that under pure and perfect competition, with equally well-informed actors, the gap between the net realizable value and the replacement cost would be minimal and could be ignored. This is not the case due to the existence of frictions in the market place, such as commissions, transportation costs and the like. A stronger argument favoring net realizable value is based upon the frequent reference by statement users to a rate of return computation. The measurement of assets influences both elements of this computation since this measurement affects the denominator directly and the numerator through the depreciation charge.

DOI

10.2308/tar-4482666

Volume

47 (2)

Pages

333-338

Language

en

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BibTeX

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