The lower-of-cost-or-net realizable value (LCNRV) approach was developed to avoid reporting inventory at an amount greater than the benefits it can provide. The LCNRV approach records losses in the period the value of the inventory drops below its cost instead of later in the period that the goods are ultimately sold. Is this a conservative or an aggressive approach? What does GAAP say about LCNRV?
Answer:   The lower cost or net realizable value approach for inventory is used for financial reporting purposes to improve the usefulness of inventory figures. The approach records losses in the period the value of the stock drops below its cost instead of later in the period that the goods are ultimately sold. The use of an accounting term, “net realizable value,” in this case indicates that the approach is one of valuation. A conservative approach is a use of an estimate. The system is convenient because it provides an estimate of value (a natural number) for the period and is thus more conservative than the traditional “accumulated value” approach, which does not provide an estimate. The net realizable value approach is also conservative in that it only provides an estimate of the value of an asset for financial reporting. The GAAP definition of “realizable value” is “the amount to be determined as of any date for the total estimated selling price (exclusive of any discount or rebates) that may ultimately be recovered from customers if the goods or services are offered in the ordinary course of business at times indicated in the contract of sale or for cash or the equivalent.”   In contrast, the LCNRV approach records an inventory item only if it is expected ... See the full answer