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Chapter 9: Q2Q (page 473)

Question: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?

Short Answer

Expert verified

The loss related to the decline in the utility of the inventories should be charged against the revenue for the period, not in the year of sale of inventories.

The arguments are:

  • Allocation of the purchase price on the basis of sales value, to the individual items.
  • Purchase commitments accounting

Step by step solution

01

Step-by-step-solutionStep1:

The value of the inventories gets reduced due to obsolescence or deterioration, in this situation inventories cannot be reported at the cost, hence it is important to record the loss related to inventory value reduction in the year which it is incurred.

02

Step 2:

In case multiple units are purchased at a single lump-sum price, then the business allocates uses the sales value basis to allocate the total purchase cost of the inventories.

There is another argument, which is related to accounting for purchase commitments. Some may believe that assets and liabilities should be recorded when the contract is signed, and some other groups may believe that delivery date should be considered to record the assets and liabilities.

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Most popular questions from this chapter

Question:At December 31, 2017, Ashley Co. has outstanding purchase commitments for 150,000 gallons, at \(6.20 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2017, is \)5.90, how would you treat this situation in the accounts?

Remmers Company manufactures desks. Most of the company鈥檚 desks are standard models and are sold on the basis of catalog prices. At December 31, 2017, the following finished desks (10 desks in each category) appear in the company鈥檚 inventory. Finished Desks A B C D 2017 catalog selling price \(45 \)48 \(90 \)105 FIFO cost per inventory list 12/31/17 47 45 83 96 Estimated cost to complete and sell 5 11 26 20 2018 catalog selling price 50 54 90 120 The 2017 catalog was in effect through November 2017, and the 2018 catalog is effective as of December 1; catalog prices are net of the usual discounts.

Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Using the LCNRV rule, determine the proper unit value for statement of financial position reporting purposes at December 31, 2017, for each of the inventory items above.

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/17 \(250,000 \) 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 鈥� Gross sales revenue (after employee discounts) 鈥� 1,410,000 Sales returns 鈥� 97,500 Markups 鈥� 120,000 Markup cancellations 鈥� 40,000 Markdowns 鈥� 45,000 Markdown cancellations 鈥� 20,000 Freight-in 42,000 鈥� Employee discounts granted 鈥� 8,000 Loss from breakage (normal) 鈥� 4,500 486 Chapter 9 Inventories: Additional Valuation Issues Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.

Under IFRS, agricultural activity results in which of the following types of assets? I. Agricultural produce II. Biological assets (a) I only. (b) II only. (c) I and II. (d) Neither I nor II.
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