Why are inventories valued at the lower of cost or net realizable value?

The lower of cost or net realizable value concept means that inventory should be reported at the lower of its cost or the amount at which it can be sold. Net realizable value is the expected selling price of something in the ordinary course of business, less the costs of completion, selling, and transportation.

Why might inventory be reported at sales prices net realizable value or market price rather than cost?

Why might inventory be reported at sales prices (net realizable value or market price) rather than cost? When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal. selling price less costs to complete and sell.

What does inventories mean on a balance sheet?

current asset
Key Takeaways. Inventory is the raw materials used to produce goods as well as the goods that are available for sale. It is classified as a current asset on a company’s balance sheet. The three types of inventory include raw materials, work-in-progress, and finished goods.

Why do we value inventory at cost?

The method for valuing inventory depends on how the stock is tracked by the business over time. A business must value inventory at cost. Since inventory is constantly being sold and restocked and its price is continually changing, the business must make a cost flow assumption that it will use frequently.

What is lower of cost or market LCM )? How is it determined and why?

The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price. Net realizable value is defined as the estimated selling price, minus estimated costs of completion and disposal.

Where are inventories on the balance sheet?

current assets section
A manufacturer’s inventory will be reported in the current assets section of the balance sheet and in the notes to the financial statements. In the current assets section the amount of the manufacturer’s inventory will be positioned after cash and cash equivalents, short-term investments, and receivables.