Question:
The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes is a departure from the accounting principle of:
A) Historical cost.
B) Matching.
C) Going concern.
D) Conservatism.
Answer:
The Right answer is A) Historical Cost.
Explanation:
Inventories are recorded at their cost. If inventory declines in value below its original cost, a major departure from the historical cost principle occurs.
Whatever the reason for a decline-damage, physical deterioration, obsolesce, changes in price levels, or other causes, a company should write down the inventory to Lower-of-Cost or Net Realizable Value (LCNRV) to report this loss.
A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.
Net Realizable Value refers to the net amount that a company expects to realize from the sale of inventory. Specifically, net realizable value is the estimated selling price in the normal course of business minus estimated costs to make a sale.
Example
Inventory Value - Unfinished $2,000
Less: Estimated Cost of Completion $ 50
Estimated Cost to sell 200 250
Net Realizable Value 750
Cheers!
When using the lower of cost or net realizable value method to value inventory we are deviating from historical cost.
Inventory is normally recorded at the historical cost at which it was originally purchased.
Sometimes however, it is best to the the Lower of cost or Net Realizable method when the inventory has lost value over the period.
In conclusion, option C is correct.
Find out more on the lower of cost method at https://brainly.com/question/25566024.
