3 Lower OF COST AND NET Realizable Value Lcnrv Reviewer PDF

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Summary

This is a reviewer on Lower of cost and net realizeable value on Intermediate Accounting 2. The concepts are provided in the file below that summarizes everything on the said chapter....

Description

LOWER OF COST AND NET REALIZABLE VALUE LCNRV Measurement of Inventory  Inventories shall be measured at the Lower of Cost or Net Realizable Value LCNRV  After determining the cost of inventories using either FIFO or Weighted Average, it is important to know the Net Realizable Value. Net Realizable Value (NRV) Estimated selling price in the ordinary course of business Less: Estimated cost of completion Estimated cost of disposal Net realizable value

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Cost of inventories may not be recoverable if  Those inventories are damaged  They have become obsolete, wholly or partially  Their selling price have declined  The estimated cost of completion or estimated cost to sell has increased Why are inventories written down to NRV?  Assets shall NOT be carried in excess of amounts expected to be realized from their sale or use. Determination of NRV  Inventories are written down to NRV on an ITEM BY ITEM or INDIVIDUAL basis Cost < NRV 

No accounting problem ; inventory is stated at cost ; increase in value is NOT recognized Cost > NRV

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Inventory is measured at NRV

Methods of Accounting for Inventory Write-down a. Direct method or Cost of Goods Sold method b. Allowance method or loss method

Whether Direct method or Allowance method, COGS must be the same. DIRECT METHOD Inventory beginning (lower amount) Add: Net purchases Goods available for sale Less: Inventory end (lower amount) Cost of goods sold

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ALLOWANCE METHOD Inventory beginning (at cost) Add: Net purchases Goods available for sale Less: Inventory end (at cost) Cost of goods sold before writedown Add: Loss on inventory write-down Cost of goods sold after inventory write-down

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Loss on inventory writedown is ADDED to Cost of Goods Sold

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Gain on reversal of inventory writedown is DEDUCTED from Cost of Goods Sold  The amount of any reversal of any write-down of inventory from an INCREASE in NRV shall be recognized as a deduction in the amount of inventory recognized as an expense* in the period in which the reversal occurs. * actually the cost of goods sold

Purchase commitments

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Obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity Any losses which are expected to arise from firm and noncancelable commitments shall be recognized If there is a decline in purchase price after a purchase commitment has been made, a loss is recorded in the period of price decline If at the end of the accounting period, the purchase price falls BELOW the agreed price,

Debit Loss on Purchase Commitment Credit Estimated Liability on Purchase Commitment 

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The recognition of a Loss on Purchase Commitment is an adaptation of the measurement at the LCNRV. If the market price rises by the time the firm makes the purchase, a Gain on purchase commitment would be recorded. However, the amount of gain to be recognized SHOULD NOT EXCEED the loss on purchase commitment previously recorded. The Gain on purchase commitment is classified as OTHER INCOME....