Why are inventories valued at the lower-of-cost-or-net realizable value (LCNRV)? What are the arguments against the use of the LCNRV method of valuing inventories?
Why are inventories valued at the lower-of-cost-or-net realizable value (LCNRV)? What are the arguments against the use of the LCNRV method of valuing inventories?
Related questions
Almaden Hardware Store sells two product categories, tools and paint products. Information pertaining to its 2018 year-end inventory is as follows:
| Inventory, by Product Category | Quantity | Per Unit Cost | Net Realizable Value | ||||||||
| Tools: | |||||||||||
| Hammers | 100 | $ | 4.50 | $ | 5.00 | ||||||
| Saws | 150 | 9.50 | 8.50 | ||||||||
| Screwdrivers | 250 | 1.50 | 2.10 | ||||||||
| Paint products: | |||||||||||
| 1-gallon cans | 450 | 5.50 | 4.50 | ||||||||
| Paint brushes | 100 | 3.50 | 4.00 | ||||||||
Required:
1. Determine the carrying value of inventory at year-end, assuming the lower of cost or net realizable value (LCNRV) rule is applied to (a) individual products, (b) product categories, and (c) total inventory.
2. Assuming that the company reports an inventory write-down as a line item in the income statement, for each of the LCNRV applications determine the amount of the loss.
The inventory of Flint Company on December 31, 2017, consists of the following items.
| Part | Quantity | Cost per Unit | Net Realizable Value | ||||
| 110 | 570 | $124 | $131 | ||||
| 111 | 1,010 | 79 | 68 | ||||
| 112 | 450 | 105 | 100 | ||||
| 113 | 210 | 223 | 236 | ||||
| 120 | 380 | 269 | 272 | ||||
| 121 | a | 1,600 | 21 | 1 | |||
| 122 | 310 | 314 | 308 | ||||
a Part No. 121 is obsolete and has a realizable value of $1 each as scrap.
(a) Determine the inventory as of December 31, 2017, by the LCNRV method, applying this method to each item.
| Inventory as of December 31, 2017 | $ |
(b) Determine the inventory by the LCNRV method, applying the method to the total of the inventory.
| Inventory as of December 31, 2017 | $ |
