Determining Inventory Reporting: Cost or Net Realizable Value (NRV)
Question:
Based on the inventory items and their respective costs and NRV listed in the scenario, how should each item be reported - at cost or net realizable value (NRV)?
Final answer:
In the Chevrolet dealership scenario, the prices are reported based on the lower of cost or net realizable value (NRV) principle. For the vans, trucks, and SUVs, the NRV is the lower value to report, while for the sedans and sports cars, the cost is considered as they're the lower value.
Explanation:
In accounting, the lower of cost or market (LCM) rule requires companies to record their inventory at the lower of either the historical cost or the market value (Net Realizable Value-NRV). In this scenario, where the Chevrolet dealership has noticed a reduced demand for certain types of vehicles, we'll need to review each type of vehicle, comparing the cost per unit to the Net Realizable Value (NRV) per unit and choose the lower value for reporting purposes.
- Vans: The NRV of $16,000 is the lower value compared to the cost of $18,000.
- Trucks: The NRV of $15,200 is lower than the cost of $16,200.
- 2-door sedans: The cost of $11,200 is lower than the NRV of $13,200.
- 4-door sedans: The cost of $15,200 is lower than the NRV of $18,200.
- Sports cars: The cost of $28,000 is lower than the NRV of $31,000.
- SUVs: The NRV of $19,000 is lower than the cost of $26,400.
Inventory items can be reported at cost or net realizable value (NRV), depending on which value is lower. The principle of lower of cost or NRV ensures that inventory is reported at the most conservative value to reflect market conditions accurately. In this case, the reduced demand for certain types of vehicles has influenced the reporting method for the Chevrolet dealership's inventory.
When determining whether to report an inventory item at cost or NRV, it is essential to compare the cost per unit and NRV per unit. If the cost per unit is lower, the item should be reported at cost. Conversely, if the NRV per unit is lower, the item should be reported at NRV.
By following the LCM rule and analyzing each inventory item's cost and NRV, companies can accurately reflect the market conditions and make informed financial decisions based on the most conservative values.