Question

Rustic Furnishings reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory. What is the method used by Rustic Furnishings to report inventory?

1) First-in, first-out (FIFO)
2) Last-in, first-out (LIFO)
3) Weighted average cost
4) Lower of cost and net realizable value (NRV)

Answer 1

Rustic Furnishings uses the lower of cost and net realizable value (NRV) method for reporting their inventory, which means they report inventory on the balance sheet at the lower of the original cost or the current market value.

Step-by-step explanation:

Rustic Furnishings reports inventory using the lower of cost and net realizable value (NRV). The method Rustic Furnishings uses to report inventory is not FIFO, LIFO, or the weighted average cost method. Instead, Rustic Furnishings uses the approach where the inventory is reported at the lower of the two amounts, cost or the net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, minus any costs of completion, disposal, and transportation.

In practice, this method means comparing the original cost of the inventory with the current market value, and then reporting the inventory on the balance sheet at the lower of these two figures. This is done to prevent overstating the value of the inventory and is consistent with the conservatism principle of accounting, which provides guidance that potential losses should be recognized as soon as they are foreseen. This approach is particularly important for furnishings businesses, where inventory items may fluctuate in value due to fashion trends, seasonality, and other market dynamics.