Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Lower of Cost or Market

Financial Accounting

5. Inventory

Lower of Cost or Market

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Multiple Choice

The lower of cost and net realizable value (LCNRV) method was developed to:

Prevent overstatement of inventory and ensure assets are not reported above amounts expected to be realized from their sale.

Eliminate the need for inventory write-downs under any circumstances.

Maximize reported net income by increasing the value of inventory.

Allow companies to choose the highest possible inventory value for tax benefits.

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Verified step by step guidance

Understand the concept of the LCNRV method: The lower of cost and net realizable value (LCNRV) is a conservative accounting principle used to value inventory. It ensures that inventory is reported at the lower of its original cost or the amount expected to be realized from its sale (net realizable value).

Identify the purpose of LCNRV: The primary goal of this method is to prevent overstatement of inventory values on the balance sheet. This ensures that assets are not reported at amounts higher than what can be reasonably expected to be recovered through their sale.

Analyze the incorrect options: The LCNRV method does not eliminate the need for inventory write-downs under all circumstances. It also does not aim to maximize reported net income or allow companies to choose the highest inventory value for tax benefits.

Relate LCNRV to financial reporting principles: LCNRV aligns with the principle of conservatism in accounting, which prioritizes caution in reporting financial figures to avoid overstating assets or income.

Conclude the correct answer: The LCNRV method was developed to prevent overstatement of inventory and ensure assets are not reported above amounts expected to be realized from their sale.