1. What is Net realizable value? How we calculate NRV?

Net realizable value (NRV) is the value of an asset that can be realized upon the sale of the
asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of
the asset.
NRV= Sales value - Costs. NRV is a means of estimating the value of end-of-
year inventory and accounts receivable
2. What is LCNRV (LOWER-OF-COST-OR-NET REALIZABLE VALUE)?
A company abandons the historical cost principle when the future utility (revenue-producing
ability) of the asset drops below its original cost.
What is the purpose of the LCNRV method? The purpose of using the LCNRV method is to
reflect the decline of inventory value below its original cost. A departure from cost is justified on
the basis that a loss of utility should be reported as a charge against the revenues in the period
in which it occurs.
How is Lcnrv inventory value calculated?
The full formula is: Beginning inventory + Purchases - Ending inventory = Cost of goods sold.
*What is LCM? (How we find inventory value)
The lower of cost or market rule(LCM) states that a business must record the cost of
inventory at whichever cost is lower – the original cost or its current market price. it is recorded
on the balance sheet at either the historical cost or the market value. Historical cost refers to the
cost at which the inventory was purchased.
Compare replacement cost to net realizable value and net realizable value minus a normal profit
margin. If:
 Replacement cost > net realizable value, use net realizable value for replacement cost.
 Replacement cost < net realizable value minus a normal profit margin, use net realizable
value minus a profit margin for replacement cost.
 Net realizable value minus a normal profit margin < replacement cost < net realizable
value, use replacement cost.

(3)What is Ceiling?
Ans: Ceiling means preventing Overvaluation of obsolete, damaged, or shopworn inventories.
4. What is floor?
Ans: Floor means understatement of inventory and overstatement of the loss in the current
period.
6. Under which retail inventory method we consider mark down?
Ans: cost method. It reflects an average cost of the two items of the com- modity
without considering the loss on the one item. If markdowns are not considered, the result is
the lower-of-cost-or-market method (assumption A).
You can use the conventional retail method or the retail method. The conventional retail
method includes markups but not markdowns, which means you'll have a lower
ending inventory value. The retail method uses both markups and markdowns in the ratio,
and you'll have a higher inventory value.
7. Which kind of spoilage we consider? (while calculating the percentage of inventory in
retail method)
Ans: Normal spoilage. Normal spoilage refers to the inherent worsening of products during
the production or inventory processes of the sales cycle.
8. What is relative sales method? Why we use it? Give example
Ans: A method used by retailers, to value inventory without a physical count, by converting retail
prices to cost. The relative sales value method is a technique used to allocate joint costs
based on the prices at which products will be sold. For example, a production process incurs
$100 of costs in order to create two products, one of which (Product A) will sell for
$400 and the other (Product B) for $100.
The retail inventory method is an inventory estimation technique based upon an
observable pattern between cost and sales price that exists in most retail concerns. This
method requires that a record be kept of (a) the total cost and retail of goods purchased, (b) the
total cost and retail value of the goods available for sale, and (c) the sales for the period.
***The Retail Inventory Method is an accounting procedure used to estimate the value of
a store's inventory over time. 
We use retail inventory method because:
1) To permit the computation of net income without a physical count of inventory.
2) Control measure in determining inventory shortages.
3) Regulating quantities of merchandise on hand.
4) Insurance information.

When using the retail method of inventory costing the ending inventory cost is estimated
by?
Step 4. Determine your ending inventory by subtracting the cost of sales from cost of goods
available for sale
Methods of retail inventory method:
1- Conventional
2- Cost
3- Lifo retail
 4- Dollar value fifo
9. What is Purchase commitment? Give an example of it.
Purchase commitments are commitments by a business to purchase goods or services
at some future date at a fixed price. A business will agree to a purchase commitment in order
to fix its prices over a period of time. For example, a business might contract to purchase 2,000
units of inventory at a contract price of 1.25 a unit within 6 months.
 
10. What is COGS method? When we use this method? What we are do in this method?
Give an example.
The cost-of-goods-sold method substitutes the market value figure for cost when valuing
the inventory. Thus, the loss is buried in the cost of goods sold and no individual loss
account is reported in the income statement
11. What is loss method? ? When we use this method? What we are do in this method?
Give an example.
Under the loss method, an entry is made debiting a loss and crediting an allowance
account for the difference between cost and market.
12. What is Gross Profit method?
Answer: It is a method that estimates the value of inventory by applying the company's
historical gross profit percentage to current‐period information about net sales and the
cost of goods available for sale.
disadvantage of Gross profit method:
1. It is an estimate.
2. It generally relies on past percentages in determining the markup.
3. Care must be exercised when applying a blanket gross profit rate when
there are varying gross profits.
Normally unacceptable for financial reporting purposes. GAAP requires a physical
inventory as additional verification.
What is the purpose of the LCNRV method? The purpose of using the LCNRV method is to
reflect the decline of inventory value below its original cost. A departure from cost is justified on
the basis that a loss of utility should be reported as a charge against the revenues in the period
in which it occurs.
**Instead of crediting the Inventory account for market adjustments, companies generally
use an allowance account, often referred to as Allowance to Reduce Inventory to NRV.
Using an allowance account under the loss method, Ricardo Company makes the
following entry to record the inventory write-down to NRV.
Loss Due to Decline of Inventory to NRV 12,000
Allowance to Reduce Inventory to NRV 12,000