LCNRV & LCM Flashcards
Concept Questions
What is the effect of an inventory write-down on a company’s financial statements?
Reduce reported inventory and reduce net income
Which inventory methods require companies to report inventory at the lower of cost or market?
LIFO and retail inventory method
When NRV is below cost, where are inventory write-downs usually included?
As a part of COGS
What does the LCNRV approach require companies to do?
Compare the inventory’s cost to its NRV
What is the NRV of an inventory item?
The estimated selling price minus the costs of completion, disposal and transportation
What happens when the NRV of inventory is lower than its cost?
An adjusting entry is needed to reduce inventory to its NRV
What is the primary reason that applying the LCNRV rule to groups of inventory items results in a higher inventory valuation?
Grouping permits increases in the NRV of some items to offset the decreases in others.
What is a key requirement when applying the LCNRV rule to inventory valuation?
It should be applied consistently from one period to another
What is the required accounting treatment when the NRV of inventory falls below cost?
Write down inventory to the lower NRV
In which account are typical inventory write-downs usually included?
COGS (Loss on inventory)
What should be done when an inventory write-down is substantial and unusual?
Record it in a separate loss account and disclose it.
What is the definition of ‘market’ for companies that use LIFO or the retail inventory method?
The inventory’s current replacement cost
What forms the ‘ceiling’ on market value in the LCM approach?
NRV
For companies that use FIFO or average cost methods, at what value is inventory reported?
LCNRV
How is ending inventory under LCM calculated?
By comparing each item’s market amount to its cost and choosing the lower value
