ACCT 312 Ch 8 Flashcards
Net realizable Value
Estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation
How do companies price inventory
On an item-by-item basis
How would I adjust inventory in the Cost of Goods Sold method vs the Loss method
Loss method would result typically in a debit for inventory lost and a credit for inventory. COGS method would result in a credit for inventory but, a debit for COGS
Exception for LCNRV approach for companies that use the LIFO or Retail inventory methods
Rather than comparing cost to NRV, companies compare a “designated market value” of inventory to cost. Lower-of-Cost-or-Market (LCM)
LCM? how does it work?
two limitations (Net realizable ceiling and Net Realizable floor). Approach begins with replacement cost. If replacement cost is between ceiling and floor, that will be the cost, but if it is above the ceiling, then the ceiling will be the cost. Just like if it was below the floor, then the floor would be the cost.
What is the ceiling in LCM
Net Realizable Value (NRV)
What is the floor of LCM?
NRV less normal profit margin
Disadvantages of LCNRV and LCM?
Can result in mismatch in valuation or mismatch in income, or use of estimates. If mismatching occurs, the statement will be incorrect for that year and the year after because they will counter react each other to balance out.
When is Valuation at NRV permitted?
Pretty much when things are controlled (1. controlled market with quoted market applicable to all quantities. 2. No significant costs of disposal. 3. Product is available for immediate delivery)
