12. Why are inventories valued at the lower-of-cost-or-net realizable value (LCNRV)? What are
the arguments against the use of the LCNRV method of valuing inventories?
Inventories are valued at the lower-of-cost-or-net realizable value (LCNRV) in order to ensure that inventories are not overstated on the balance sheet. This method helps to prevent businesses from reporting inflated profits by maintaining the value of their inventories at a level that is closer to their actual market value.
Arguments against the use of the LCNRV method of valuing inventories include:
1. Subjectivity: Determining the net realizable value of inventories can be subjective and may vary based on different estimation methods used by different companies.
2. Potential for manipulation: Companies may have an incentive to manipulate their net realizable value in order to report higher or lower profits.
3. Lack of comparability: Using the LCNRV method can make it difficult to compare the financial performance of different companies, as they may use different methods to determine the net realizable value of their inventories.
4. Complexity: Calculating the net realizable value of inventories can be complex and time-consuming, especially for companies with a large number of inventory items.
5. Inconsistency: The LCNRV method may not always reflect the true economic value of inventories, as market conditions and demand for products can fluctuate.