- Apply the LCNRV rule to merchandise inventory
The LCNRV rule can be applied to each inventory item, each inventory class, or total inventory, and each may have different results.
Let’s refer back to Geyer, Co. which holds auto sound systems, speakers, and wiring in inventory. Let’s also assume Geyer uses the FIFO cost flow assumption. The purchasing department has given you the market value for each item according to the rule you provided to them.
| Product ID | Description | NRV |
|---|---|---|
| A101 | Wiring harness | 102.00 |
| CAB 500 | HQ Speakers | 50.00 |
| CAB 600 | HQ Speakers | 50.00 |
| MMM 333 | GPS enabled sound system | 2,625.00 |
| Rel 5 | HQ Speakers | 50.00 |
| RFS-212 | GPS enabled sound system | 400.00 |
| XPS-101 | GPS enabled sound system | 80.00 |
Apply LCM to each individual item:
| Geyer, Co. | |||||||
| 12/31/20XX | |||||||
| Product ID | Description | Cost | Quantity in Stock | Total Cost (FIFO) | NRV | LCNRV | Total at LCNRV |
|---|---|---|---|---|---|---|---|
| A101 | Wiring harness | 99.000 | 30 | 2,970.00 | 102.00 | 99.00 | 2,970.00 |
| CAB 500 | HQ Speakers | 58.000 | 500 | 29,000.00 | 50.00 | 50.00 | 25,000.00 |
| CAB 600 | HQ Speakers | 99.000 | 15 | 1,485.00 | 50.00 | 50.00 | 750.00 |
| MMM 333 | GPS enabled sound system | 1,255.500 | 64 | 80,352.00 | 2,625.00 | 1,255.50 | 80,352.00 |
| Rel 5 | HQ Speakers | 110.000 | 100 | 11,000.00 | 50.00 | 50.00 | 5,000.00 |
| RFS-212 | GPS enabled sound system | 650.000 | 150 | 97,500.00 | 400.00 | 400.00 | 60,000.00 |
| XPS-101 | GPS enabled sound system | 102.375 | 160 | 16,380.00 | 80.00 | 80.00 | 12,800.00 |
| Total Inventory FIFO | $ 238,687.00 | $ 186,872.00 | |||||
We see that market is lower than cost, so the amount we would report on the balance sheet would be $186,872.
Apply LCNRV to the entire inventory:
| Geyer, Co. | |||||||
| 12/31/20XX | |||||||
| Product ID | Description | Cost | Quantity in Stock | Total Cost (FIFO) | NRV | Total at NRV | |
|---|---|---|---|---|---|---|---|
| MMM 333 | GPS enabled sound system | 1,255.500 | 64 | 80,352.00 | 2,625.00 | 168,000.00 | |
| RFS-212 | GPS enabled sound system | 650.000 | 150 | 97,500.00 | 400.00 | 60,000.00 | |
| XPS-101 | GPS enabled sound system | 102.375 | 160 | 16,380.00 | 80.00 | 12,800.00 | |
| CAB 500 | HQ Speakers | 58.000 | 500 | 29,000.00 | 50.00 | 25,000.00 | |
| CAB 600 | HQ Speakers | 99.000 | 15 | 1,485.00 | 50.00 | 750.00 | |
| Rel 5 | HQ Speakers | 110.000 | 100 | 11,000.00 | 50.00 | 5,000.00 | |
| A101 | Wiring harness | 99.000 | 30 | 2,970.00 | 102.00 | 3,060.00 | |
| Total Inventory FIFO | $ 238,687.00 | $ 274,610.00 | |||||
We see that, overall, the market value is higher than cost if we just aggregate everything before we compare cost and market.
Finally, let’s look at the same data using three classes of inventory:
| Geyer, Co. | |||||||
| 12/31/20XX | |||||||
| Product ID | Description | Cost | Quantity in Stock | Total Cost (FIFO) | NRV | Total at NRV | |
|---|---|---|---|---|---|---|---|
| MMM 333 | GPS enabled sound system | 1,255.500 | 64 | 80,352.00 | 2,625.00 | 168,000.00 | |
| RFS-212 | GPS enabled sound system | 650.000 | 150 | 97,500.00 | 400.00 | 60,000.00 | |
| XPS-101 | GPS enabled sound system | 102.375 | 160 | 16,380.00 | 80.00 | 12,800.00 | |
| LCM Sound | 194,232.00 | 240,800.00 | |||||
| CAB 500 | HQ Speakers | 58.000 | 500 | 29,000.00 | 50.00 | 25,000.00 | |
| CAB 600 | HQ Speakers | 99.000 | 15 | 1,485.00 | 50.00 | 750.00 | |
| Rel 5 | HQ Speakers | 110.000 | 100 | 11,000.00 | 50.00 | 5,000.00 | |
| LCM Speakers | 41,485.00 | 30,750.00 | |||||
| A101 | Wiring harness | 99.000 | 30 | 2,970.00 | 102.00 | 3,060.00 | |
| Total Inventory FIFO | $ 238,687.00 | $ 274,610.00 | |||||
| LCM by class | |||||||
| Sound | 194,232.00 | ||||||
| Speakers | 30,750.00 | ||||||
| Wiring | 2,970.00 | ||||||
| 227,952.00 | |||||||
The LCNRV for sound systems was cost. The LCNRV for speakers was market, and the LCNRV for wiring was cost. In total, using the class system, we would adjust inventory down to $227,952.
In the next section, we’ll look at four different ways to make an LCNRV adjustment to inventory.