Wize University Introduction to Financial Accounting Textbook > Inventory
Lower of Cost and Net Realizable Value (LCNRV)
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Lower of Cost and Net Realizable Value
Inventory can become obsolete or damaged, this will likely decrease how much a business can sell that inventory for. If the business can no longer sell inventory for at least as much as its cost, adjustments need to be made to the inventory account.
Net Realizable Value
- The selling price less any costs to sell.
- Should be higher than cost to earn a profit.
Adjusting Inventory
- Inventory should always be reported at thelower of cost and net realizable value.
- When net realizable value falls below cost, the inventory balance must be written-down.
- Debit Cost of Goods Sold and Credit Inventory.
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Example: Lower of Cost and Net Realizable Value
The following transactions took place during August 2020, all purchases and sales were on account.
An analysis of the company's inventory on August 31st determined that the net realizable value of the remaining units was $5.25. Prepare the journal entry to record the adjustment to inventory under the following three independent assumptions:
- FIFO costing
- Average cost method average cost per unit of ending inventory is $5.27.
Practice: Lower of Cost and Net Realizable Value
A review of the company's inventory on December 31, 2020 determined that the net realizable value of the remaining units it has on hand is $200 per unit.
The company uses the FIFO inventory costing system, and the following units remain at December 31st.
150 units purchased on November 13th for $190 each
140 units purchased on December 11th for $210 each
Transactions:
| Account | Debit | Credit |
|---|---|---|