Lower of Cost and Net Realizable Value (LCNRV)
Inventory Valuation After Acquisition
After inventory is initially recorded at cost, companies must determine whether its value has declined below cost. Under U.S. GAAP, most inventory is reported at the lower of cost or net realizable value (LCNRV).
Net Realizable Value = Estimated Selling Price − Costs to Complete and Sell
- Inventory is written down when NRV falls below cost.
- Write-downs are recognized as losses.
- LCNRV prevents overstating assets.
- Subsequent recoveries generally are not reversed under U.S. GAAP.
Note
LCNRV is one of the most commonly tested inventory valuation concepts on the CPA FAR exam.
Summary
Inventory should never be reported above the amount expected to be realized from its sale.