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31 March, 04:35

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: Multiple Choice matching. going concern. historical cost. conservatism.

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  1. 31 March, 04:50
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    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!
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