CHAPTER 12 LOWER OF COST AND NET REALIZABLE VALUE Flashcards
What is the lower of cost and net realizable value (LCNRV)?
Under IRS, inventories shall be measured at the lower of cost and net realizable value.
What is net realizable value (NRV)?
Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost of disposal.
When may the cost of inventories not be recoverable?
The cost may not be recoverable when inventories are damaged, obsolete, selling prices have decreased, or estimated costs of completion or disposal have increased.
How should inventories be written down to net realizable value?
Inventories are usually written down to net realizable value on an item-by-item basis.
Is it appropriate to write down inventories based on classification?
It is not appropriate to write down inventories based on classification, such as finished goods or all inventories in a particular industry.
When can similar or related items be grouped for NRV assessment?
It may be appropriate to group similar items if they relate to the same product line, have similar purposes, are produced and marketed in the same area, and cannot be evaluated separately.
Are materials held for production written down below cost?
Materials are not written down below cost if the finished products are expected to be sold at or above cost.
What happens if cost is lower than NRV?
If cost is lower than NRV, the inventory is measured at cost and no accounting problem arises.
What happens if NRV is lower than cost?
If NRV is lower than cost, the inventory is measured at NRV and the decrease in value is recognized.
What is the direct method of accounting for inventory writedown?
The inventory is recorded at the lower of cost or NRV, and any loss or gain is included in the cost of goods sold.
What is the allowance method of accounting for inventory writedown?
The inventory is recorded at cost, and any loss on writedown is accounted for separately as a debit to loss on inventory writedown and a credit to allowance for inventory writedown.
How is the allowance account adjusted in subsequent years?
The allowance account is adjusted based on the difference between cost and NRV at year-end.
What is the total carrying amount of inventories?
The total carrying amount includes the carrying amount in classifications appropriate to the entity.
What are purchase commitments?
Purchase commitments are obligations to acquire goods in the future at a fixed price and quantity.
When is a loss on purchase commitment recognized?
A loss is recognized if there is a decline in purchase price after a purchase commitment has been made.
How is a loss on purchase commitment recorded?
A loss is recorded as a debit to loss on purchase commitments and a credit to an estimated liability.
What happens if the market price rises after a purchase commitment?
A gain on purchase commitment is recorded, limited to the loss previously recognized.
What disclosures are required about inventories?
Disclosures include accounting policies, total carrying amount, amount recognized as expense, writedown amounts, and inventories pledged as security.
How are inventories of agricultural, forest, and mineral products measured?
They are measured at net realizable value at certain stages of production.
What is the measurement basis for broker-traders’ commodities?
Broker-traders’ commodities are measured at fair value less cost of disposal.
