LCM or LCNRV

Lower of Cost or Market or Lower of Cost or NRV Rule (LCM or LCNRV):

Conservatism & Matching Principle: Cost = Original Cost

Market = Middle of 3 #:

1. Ceiling = Net Realizable Value (NRV)

   = Selling Price - Disposal Costs

  Disposal Costs = cost to complete, freight out, sale commissions

2. Floor = NRV - Normal Profit Margin

3. Replacement Cost = Purchase or Reproduction

Middle of these # is used as market, then compare market with cost and take the LOWER (LCM).

Apply the LCM only to inventory accounted for under the LIFO or retail inventory methods. For all other inventory, apply the simplified Lower of Cost of NRV (LCNRV).

Inventory valuation is based upon:

1. Individual Items

2. Categories

3. Total Inventory

Losses are recognized immediately on the I/S:

Do NOT recover loss (once inventory is written down), no recovery from the write down until the units are sold

Loss on Inventory due to Market Decline            xx

            Inventory                                                               xx

 

Lower of Cost of NRV (LCNRV):

All inventory (other than LIFO or retail inventory) are to be reported on B/S @ LCNRV.

Conservatism principle: company will normally carry inventories on B/S @ LCM (b/c declines in the market value of unsold inventories).

Problem of 2 diff markets in which the company operates:

1. Market in which the company purchases the inventories

2. Market in which the company sells the inventories

So, one will be @ cost and one will be @ market.

There are 3 diff # that need to be computed b4 market can be determined:

1. Replacement costs

2. NRV or Ceiling Cost

3. NRV - Normal Profit Margin (Floor)