Summary of Chapter 8: Lower Cost and Net Realizable Value (LCNRV)

Lower Cost and Net Realizable Value:

• Inventory reported at the lower of cost or net realizable value.

• Ensures no overstatement of economic benefits from assets.

• Avoids showing an inflated asset value on the balance sheet.

Concept of Assets:

• An asset is defined as probable future economic benefits from past transactions.

• If inventory value decreases, it must be adjusted to reflect the new realizable value (e.g., from $100 to $80).

Conservatism in Accounting:

• Recognizes losses more quickly than gains.

• Investors must be provided with accurate financial positions, hence the conservative approach to asset valuation.

Practical Application:

• Exercise to apply Lower Cost or Net Realizable Value (LCNRV).

• Identify and report inventory costs versus estimated net realizable values.

Periodic Reporting Incentives:

• Managers might prefer smoother earnings results and opt to report losses in a better period, even though losses are inevitable later.

• Strategies include crediting inventory and debiting cost of goods sold or losses depending on the reporting goals.

Reporting Differences:

• Losses can either be reflected in cost of goods sold or as a separate line item for losses.

• Consistent loss recognition can enhance earnings predictability for organizations like Walmart.