Breaking Down the Ceiling
Ever wonder what happens when your inventory tries to touch the sky and your accountant says, ‘Not so fast!’? That’s when the accounting ceiling comes into play. In simpler terms, just as the ceiling keeps you from floating into the vast blue yonder, the accounting ceiling keeps the market value of inventory from skyrocketing beyond a certain limit.
What in the World is the Ceiling? 🌎
In the USA, the accounting ceiling is set equal to the net realizable value (NRV) of an asset. Put simply, it’s the highest value at which your inventory can be valued, ensuring you don’t overestimate its worth.
Here’s a quick formula for NRV:
NRV = Expected Selling Price - Costs to Complete and Sell
This ceiling comes into play when employing the Lower of Cost or Market (LCM) method for inventory valuation. If the market value of your asset exceeds this ‘ceiling,’ you’re obligated to choose the ceiling value. No exceptions, no free passes.
Let’s Visualize the Concept (Ceiling => NRV) 📈
graph TD
A(Inventory) -->|Market Value
higher than| B(Net Realizable Value);
B -->|Ceiling| C[Lower of Cost or Market]
subgraph
