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

Under the lower of cost or net realizable value (LCNRV) rule, how should inventory be reported on the balance sheet?

At its historical cost only

At its replacement cost

At the lower of its historical cost or its net realizable value

At the higher of its historical cost or its net realizable value

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Verified step by step guidance

Understand the LCNRV rule: The lower of cost or net realizable value (LCNRV) rule is a conservative accounting principle used to ensure that inventory is not overstated on the balance sheet. It requires reporting inventory at the lower value between its historical cost and its net realizable value.

Define historical cost: Historical cost refers to the original purchase price or production cost of the inventory, including all costs necessary to bring the inventory to its current condition and location.

Define net realizable value (NRV): Net realizable value is the estimated selling price of the inventory in the ordinary course of business, minus any costs required to complete the sale, such as marketing or distribution expenses.

Compare historical cost and NRV: To apply the LCNRV rule, compare the historical cost of the inventory to its net realizable value. If the NRV is lower than the historical cost, the inventory should be reported at the NRV. If the historical cost is lower, the inventory should be reported at the historical cost.

Report inventory on the balance sheet: Based on the comparison, record the inventory value on the balance sheet at the lower of its historical cost or net realizable value. This ensures compliance with the LCNRV rule and prevents overstatement of assets.