Under the lower of cost or net realizable value (LCNRV) rule, how should inventory be reported on the balance sheet?

• A. At its historical cost only
• B. At its replacement cost
• C. At the lower of its historical cost or its net realizable value
• D. At the higher of its historical cost or its net realizable value

Answer: (C)

Verified step by step guidance

1. Understand the LCNRV rule: The lower of cost or net realizable value (LCNRV) rule is a conservative accounting principle used to ensure that inventory is not overstated on the balance sheet. It requires reporting inventory at the lower value between its historical cost and its net realizable value.
2. Define historical cost: Historical cost refers to the original purchase price or production cost of the inventory, including all costs necessary to bring the inventory to its current condition and location.
3. Define net realizable value (NRV): Net realizable value is the estimated selling price of the inventory in the ordinary course of business, minus any costs required to complete the sale, such as marketing or distribution expenses.
4. Compare historical cost and NRV: To apply the LCNRV rule, compare the historical cost of the inventory to its net realizable value. If the NRV is lower than the historical cost, the inventory should be reported at the NRV. If the historical cost is lower, the inventory should be reported at the historical cost.
5. Report inventory on the balance sheet: Based on the comparison, record the inventory value on the balance sheet at the lower of its historical cost or net realizable value. This ensures compliance with the LCNRV rule and prevents overstatement of assets.