# Lower of cost and net realizable value

> A newer model is announced and the drills will sell for less: the write-down, the month it lands in, and what it does to the margin.

Source: https://lopifi.com/learn/inventory-and-cost-of-goods-sold/lower-of-cost-and-net-realizable-value
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**When do you write inventory down to net realizable value?** A newer model is announced and the drills will sell for less: the write-down, the month it lands in, and what it does to the margin.

At month end the supplier announces a newer model, and Northwind expects the old drills to sell for less. Net of what it costs to sell them, each is now worth $52: its [net realizable value](https://lopifi.com/md/glossary/net-realizable-value). The shelf holds 17 at a FIFO cost of $55. FIFO and average-cost inventory is carried at the lower of cost and net realizable value, so the drills are written down by $51 to $884, and the loss lands in October, when the evidence appeared.

> “Inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) shall be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs.”

© Financial Accounting Foundation. All rights reserved.

— [ASC 330-10-35-1B](https://asc.fasb.org/330/tableOfContent), FIFO and average-cost inventory is carried at the lower of cost and net realizable value

**Wrong:** 1300 Inventory   935
(at cost, until they sell)

**Right:** 1300 Inventory   884
(51 written down in October)

Leaving the drills at cost carries an asset at more than it will ever bring in. The loss belongs to the month the evidence appeared, not to the month the drills finally sell.

| October drills | Amount |
| --- | --- |
| Revenue — the deposit order and the trade order | 10,200 |
| Cost of the drills sold | (2,210) |
| Gross profit on drills sold | 7,990 |
| Shrinkage (OCT-9) | (55) |
| Write-down to net realizable value (OCT-10) | (51) |

Gross margin on the drills sold in October, FIFO. The loss lines sit inside cost of revenue but are read separately.

## Where this page's rules come from

- [ASC 330-10-35-1B](https://asc.fasb.org/330/tableOfContent) — FIFO and average-cost inventory is carried at the lower of cost and net realizable value (codification)
- [Wikipedia, “Lower of cost or market”](https://en.wikipedia.org/wiki/Lower_of_cost_or_market) — Lower of cost or market (reference)

## Read further

- https://lopifi.com/md/journal-entries/inventory-write-down
- https://lopifi.com/md/accounting/gross-margin

- **Track:** [Accounting](https://lopifi.com/md/learn/accounting)
- **Part of:** [Inventory and cost of goods sold](https://lopifi.com/md/learn/inventory-and-cost-of-goods-sold) — 4 min
- **Terms taught:** [Net realizable value](https://lopifi.com/md/glossary/net-realizable-value), [Inventory](https://lopifi.com/md/glossary/inventory), [Gross margin](https://lopifi.com/md/glossary/gross-margin)
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