A company uses the FIFO inventory costing method. At year-end, the inventory records show 500 units on hand. The cost of the last 500 units purchased was $12 per unit. The current replacement cost of these units is $11 per unit, and their net realizable value (NRV) is $13 per unit. The normal profit margin is $2 per unit. What is the value of the ending inventory using the lower-of-cost-or-net-realizable-value (LCNRV) rule?
- A$5,500
- B$7,500
- C$6,500
- D$6,000
Show answer & explanationAnswer & explanation
Correct answer: D. $6,000
Under the lower-of-cost-or-net-realizable-value (LCNRV) rule (used for FIFO/Weighted-Average), inventory is valued at the lower of its historical cost or its net realizable value. The historical cost of the ending inventory (using FIFO) is the cost of the last 500 units purchased, which is 500 units * $12/unit = $6,000. Net realizable value (NRV) is the estimated selling price less the estimated costs of completion and disposal. Here, NRV is given as $13 per unit, so 500 units * $13/unit = $6,500. Comparing the historical cost ($6,000) and NRV ($6,500), the lower value is $6,000. The replacement cost and normal profit margin are relevant for the lower-of-cost-or-market rule (LCM), which is used for LIFO/Retail methods, but not LCNRV.
Why the other options are wrong
- A. This would be the value if inventory was written down to replacement cost, which is not the LCNRV rule for FIFO.
- B. This is an incorrect calculation, possibly using an inappropriate value or misinterpreting the rule.
- C. This is the net realizable value, which is higher than the historical cost, so it's not the LCNRV.
Lower-of-Cost-or-Net-Realizable-Value (LCNRV)
An inventory valuation rule that requires inventory to be reported at the lower of its historical cost or its net realizable value (estimated selling price less costs to complete and sell).
- Used for inventory valued under FIFO or weighted-average methods.
- Net realizable value (NRV) is the ceiling (upper limit) for valuation.
- Losses are recognized in the period the value decline occurs.
Memory trick: Inventory's Low: LCNRV for FIFO, LCM for LIFO's flow.