Inventory: Valuation, Adjustments, and Estimates – Essaylink

 

Conservatism and LCNRV—The FASB recently began requiring companies (other than those that use LIFO or
the retail inventory method) to report inventory at the lower of cost and net realizable value (LCNRV). LCNRV
provides a clear example of conservatism in accounting. When NRV falls below cost, we record the bad news.
On the other hand, when NRV is above cost, we don’t record the good news.
Conservatism and LCM—Until recently, all companies were required to report inventory at the lower of cost or
market (LCM). Now, however, only companies that use LIFO or the retail inventory method are required to use
LCM. Market (1) cannot exceed NRV or (2) be less than NRV minus a normal profit margin. An easy way to
apply this requirement is to put replacement cost, NRV, and NRV minus a normal profit margin in order from
highest to lowest dollar value. Whichever appears in the middle is the correct choice.
Discuss:
FASB has not provided a conceptual explanation for why LCNRV is more appropriate for one set of companies,
while LCM is more appropriate for another set. The FASB’s recent proposal to move all companies to LCNRV
(and near convergence with IFRS) failed? Research this failed proposal and using at least one outside source
discuss the failure (ie who was involved, what happen, why it failed)
Comprehension:
Using your 10-k complete the following:
Identify and explain the method(s) used to value inventories.
Assume that in the most recent fiscal year, the company discovered that last year’s ending inventory was
overvalued by $10 million due to a mathematical error and:
Describe the accounting treatment of the error

 

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