Lower of Cost or Net Realizable Value Applied

Learning Outcomes

  • Apply the LCNRV rule to merchandise inventory

The LCNRV rule can be applied to each inventory item, each inventory class, or total inventory, and each may have different results.

Let’s refer back to Geyer, Co. which holds auto sound systems, speakers, and wiring in inventory. Let’s also assume Geyer uses the FIFO cost flow assumption. The purchasing department has given you the market value for each item according to the rule you provided to them.

Product ID Description NRV
A101 Wiring harness 102.00
CAB 500 HQ Speakers 50.00
CAB 600 HQ Speakers 50.00
MMM 333 GPS enabled sound system 2,625.00
Rel 5 HQ Speakers 50.00
RFS-212 GPS enabled sound system 400.00
XPS-101 GPS enabled sound system 80.00

Apply LCM to each individual item:

Inventory List
Geyer, Co.
12/31/20XX
Product ID Description Cost Quantity in Stock Total Cost (FIFO) NRV LCNRV Total at LCNRV
A101 Wiring harness 99.000 30 2,970.00 102.00 99.00 2,970.00
CAB 500 HQ Speakers 58.000 500 29,000.00 50.00 50.00 25,000.00
CAB 600 HQ Speakers 99.000 15 1,485.00 50.00 50.00 750.00
MMM 333 GPS enabled sound system 1,255.500 64 80,352.00 2,625.00 1,255.50 80,352.00
Rel 5 HQ Speakers 110.000 100 11,000.00 50.00 50.00 5,000.00
RFS-212 GPS enabled sound system 650.000 150 97,500.00 400.00 400.00 60,000.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00 80.00 80.00 12,800.00
Total Inventory FIFO $ 238,687.00 $ 186,872.00

We see that market is lower than cost, so the amount we would report on the balance sheet would be $186,872.

Apply LCNRV to the entire inventory:

Inventory List
Geyer, Co.
12/31/20XX
Product ID Description Cost Quantity in Stock Total Cost (FIFO) NRV Total at NRV
MMM 333 GPS enabled sound system 1,255.500 64 80,352.00 2,625.00 168,000.00
RFS-212 GPS enabled sound system 650.000 150 97,500.00 400.00 60,000.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00 80.00 12,800.00
CAB 500 HQ Speakers 58.000 500 29,000.00 50.00 25,000.00
CAB 600 HQ Speakers 99.000 15 1,485.00 50.00 750.00
Rel 5 HQ Speakers 110.000 100 11,000.00 50.00 5,000.00
A101 Wiring harness 99.000 30 2,970.00 102.00 3,060.00
Total Inventory FIFO $ 238,687.00 $ 274,610.00

We see that, overall, the market value is higher than cost if we just aggregate everything before we compare cost and market.

Finally, let’s look at the same data using three classes of inventory:

Inventory List
Geyer, Co.
12/31/20XX
Product ID Description Cost Quantity in Stock Total Cost (FIFO) NRV Total at NRV
MMM 333 GPS enabled sound system 1,255.500 64 80,352.00 2,625.00 168,000.00
RFS-212 GPS enabled sound system 650.000 150 97,500.00 400.00 60,000.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00 80.00 12,800.00
LCM Sound 194,232.00 240,800.00
CAB 500 HQ Speakers 58.000 500 29,000.00 50.00 25,000.00
CAB 600 HQ Speakers 99.000 15 1,485.00 50.00 750.00
Rel 5 HQ Speakers 110.000 100 11,000.00 50.00 5,000.00
LCM Speakers 41,485.00 30,750.00
A101 Wiring harness 99.000 30 2,970.00 102.00 3,060.00
Total Inventory FIFO $ 238,687.00 $ 274,610.00
LCM by class
Sound 194,232.00
Speakers 30,750.00
Wiring 2,970.00
227,952.00

The LCNRV for sound systems was cost. The LCNRV for speakers was market, and the LCNRV for wiring was cost. In total, using the class system, we would adjust inventory down to $227,952.

In the next section, we’ll look at four different ways to make an LCNRV adjustment to inventory.

Practice Question