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

Obsolescence, over supply, defects, major price declines, and similar problems can contribute to uncertainty about the “realization” (conversion to cash) for inventory items. Therefore, accountants evaluate inventory and employ lower of cost or net realizable value considerations.

What is net realizable value less a normal profit margin?

NRV equals expected selling price less the sum of expected cost of completion and expected cost needed to make the sale. Lower limit (also called floor) is net realizable value less normal profit margin on the inventory.

What is lower of cost or net realizable value Lcnrv?

Generally accepted accounting principles require that inventory be valued at the lesser amount of its laid-down cost and the amount for which it can likely be sold — its net realizable value (NRV). This concept is known as the lower of cost and net realizable value, or LCNRV.

Why do Inventories write down to lower of cost and 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. Thus, if inventory is stated in the accounting records at an amount higher than its net realizable value, it should be written down to its net realizable value.

What is normal profit margin?

What is a good profit margin? You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10\% net profit margin is considered average, a 20\% margin is considered high (or “good”), and a 5\% margin is low.

What does a high net profit margin of any company demonstrate?

A high net profit margin means that a company is able to effectively control its costs and/or provide goods or services at a price significantly higher than its costs.

Why is the Lcnrv applied to inventory valuation?

The lower of cost and net realizable value can be applied to individual inventory items or groups of similar items. The purpose of the adjusting entry is to ensure that inventory is not overstated on the balance sheet and that income is not overstated on the income statement.

How are inventories valued in financial statements?

Inventory valuation is the monetary amount associated with the goods in the inventory at the end of an accounting period. The most widely used methods for valuation are FIFO (first-in, first-out), LIFO (last-in, first-out) and WAC (weighted average cost).