Question

Question:What approaches may be employed in applying the LCNRV procedure? Which approach is normally used and why?

Short answer

The LCNRV can be applied on the basis of individual items, major categories, and total items. Individual item basis is generally used, as it provides the conservative valuation of inventories in the balance sheet.A

Step-by-step solution

Step-by-step-solutionStep1:

Under the individual items basis (or item-by-item basis), lower-of-cost-or-net-realizable-value is applied to individual items in the inventories.

Under the major categories basis, lower-of-cost-or-net-realizable-value is applied on the basis of different categories of inventories held by the business. In this approach, high selling price is offset partially.

Under the total approach, lower-of-cost-or-net-realizable-value is applied on the basis of the total value of the inventory. In this approach, the high selling price is offset totally.

Step 2:

In the normal scenario, individual item basis is followed to apply the LCNRV method as it indicates the correct value of the inventory, for reporting in the balance sheet.