Why Are Inventories Valued At The Lower Of Cost Or Net Realizable Value Lcnrv )?

Why is inventory valued at lower of cost?

Historical cost refers to the cost at which the inventory was purchased.

This holds significance, because if the price at which the inventory can be sold falls below the net realizable value of the item, thus triggering a loss for the company, then the lower of cost or market method can be employed to record the loss..

Why NRV is lower than cost?

This simply means that if inventory is carried on the accounting records at greater than its net realizable value (NRV), a write-down from the recorded cost to the lower NRV would be made. In essence, the Inventory account would be credited, and a Loss for Decline in NRV would be the offsetting debit.

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?

The arguments against the use of the LCNRV method of valuing inventories is that the result derived may be inconsistent due to the application of LCNRV as inventory may be reported at cost in one year and may be at market value in next year. This can lead to distortion of some data.

How do you calculate lower of cost or net realizable value?

Find all costs associated with the completion and the sale of an asset (cost of production, advertising, transportation). Calculate the difference between the market value (expected selling price of an asset) and the costs associated with the completion and sale of an asset. It is a net realizable value of an asset.

Why is the Lcnrv applied to inventory valuation?

The lower of cost and net realizable value can be applied to individual inventory items or groups of similar items. … The purpose of the adjusting entry is to ensure that inventory is not overstated on the balance sheet and that income is not overstated on the income statement.

Which statement concerning lower of cost or net realizable value Lcnrv is incorrect?

Which statement concerning lower-of-cost-or-net-realizable-value (LCNRV) is incorrect? LCNRV is an example of a company choosing the accounting method that will be least likely to overstate assets and income. The LCNRV basis is justified because of a decline in the selling price of the inventory item.