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Intermediate Accounting I – ACCT-2321Instructional HandoutChapter 9: Lower of Cost and Net Realizable Value (LCM)GAAP requires that inventories be reported at the lower of cost and net realizable value. This method complies with the principle of conservatism and provides a means to value inventory in line with the benefits it can provide and recognizes losses in inventory due to conditions such as obsolescence in the period in which they Realizable Value (NRV) - estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposalHow to Value Inventory Using Lower or Cost or NRVThe Lower of Cost and Net Realizable Value rule can be applied to individual inventory items, logical inventory categories, or the entire inventory.Step 1 – Determine Net Realizable ValueSelling Price Less Estimated Costs to SellStep 2 – Compare Cost to NRVCostNRVChoose unless NRV is lessChoose if less than CostAdjusting Cost to NRVThe Lower of Cost and NRV approach to valuing inventory recognizes losses in the accounting period when the value of inventory declines below cost. An adjusting journal entry is required to bring the inventory value in line with the current estimate. The loss on inventory valuation may be recorded by debiting Cost of Goods Sold (use when inventory losses are commonplace) or Loss on Write-down of Inventory (use for material unusual or infrequent inventory losses). Increases in inventory value are never recorded.Journalizing the AdjustmentDebitCreditLoss on Write-Down of InventoryXX InventoryXXORCost of Goods SoldXX InventoryXX ................
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