![]() It is noteworthy that the lower-of-cost-or-NRV adjustments can be made for each item in inventory, or for the aggregate of all the inventory. It is also important to note that a company using LIFO or the retail method (as described in the next section of this chapter) would not use the lower-of-cost-or-NRV method, but would instead value inventory at lower of cost or “market.” Substitution of the word “market” entails subtle technical distinctions, the details of which are usually covered in more advanced accounting classes. Obviously, these measurements can be somewhat subjective, and may require the exercise of judgment in their determination. NRV, in the context of inventory, is the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal, and transportation. This debit would be reported in the income statement as a charge against (reduction in) income. In essence, the Inventory account would be credited, and a Loss for Decline in NRV would be the offsetting debit. This simply means that if inventory is carried on the accounting records at greater than its net realizable value (NRV), a write-down from the recorded cost to the lower NRV would be made. Therefore, accountants evaluate inventory and employ lower of cost or net realizable value considerations. Obsolescence, over supply, defects, major price declines, and similar problems can contribute to uncertainty about the “realization” (conversion to cash) for inventory items. In the case of inventory, a company may find itself holding inventory that has an uncertain future meaning the company does not know if or when it will sell. ![]() This is not a hardened rule, just a general principle of measurement. Conversely, liabilities would tend to be presented at higher amounts in the face of uncertainty. Conservatism dictates that accountants avoid overstatement of assets and income.
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