Question

Which statement concerning lower-of-cost-or-net-realizable-value (LCNRV) is incorrect? LCNRV is an example of a company choosing the accounting method that will be least likely to overstate assets and income. The LCNRV basis is justified because of a decline in the selling price of the inventory item. LCNRV is applied after one of the cost flow assumptions has been applied. Under the LCNRV basis, market does not apply because assets are always recorded and maintained at cost.

Answer 1

The LCNRV basis is used to ensure that inventory is stated at the lower of cost or net realizable value (estimated selling price less any costs necessary to make the sale). It is not applied after a cost flow assumption has been applied, but rather when there is a decline in the selling price of the inventory item. Market does apply under the LCNRV basis.

Step-by-step explanation:

The statement that is incorrect concerning lower-of-cost-or-net-realizable-value (LCNRV) is: LCNRV is applied after one of the cost flow assumptions has been applied. LCNRV is not applied after a cost flow assumption has been applied, but rather it is applied when there is a decline in the selling price of the inventory item.

The LCNRV basis is used to ensure that inventory is stated at the lower of its cost or its net realizable value (the estimated selling price less any costs necessary to make the sale).

This helps prevent overstatement of assets and income.

Under the LCNRV basis, market does apply. If the net realizable value of the inventory item drops below its cost, a write-down is recorded to lower the inventory value to its net realizable value.