Chapter 9, Problem 9.1Q

Explain the (a) lower of cost or net realizable value (LCNRV) approach and the (b) lower of cost or market (LCM) approach to valuing inventory.

To determine

Merchnadise Inventory: It refers to the current assets that a company expects to sell during the normal course of business operations, the goods that are under process to be completed for future sale, or currently used for producing goods to be sold in the market.

To Explain: LCNRV (Lower of Cost or Net Realizable Value) approach

Explanation of Solution

LCNRV (Lower of Cost or Net Realizable Value) approach is an approach that compares the cost of the inventory with the net realizable value of the inventory. Net realizable value refers to an estimated selling price that a company expects to collect in the form of cash from the customers by the sale of inventory.

This approach avoids the inventory to be reported at an amount higher than the cash collected by the company on the sale.

This approach is used by the companies who follow FIFO, average cost or any other method except LIFO or retail inventory method for inventory valuation.

To determine

To Explain: LCM (Lower of Cost or Market) approach

Explanation of Solution

LCM (Lower of Cost or Market) approach is an approach that values the inventory at historical cost or lesser than the market replacement cost. The replacement cost refers to the amount that could be realized from the sale of the inventory.

This approach is used by the companies who follow LIFO or retail inventory method for inventory valuation.