Which statement accurately describes the LCNRV rule for inventory under GAAP?

• A. Inventory is measured at the lower of cost and NRV; write-downs are recognized and reversals are prohibited
• B. Inventory is measured at cost only; NRV is ignored
• C. Inventory is measured at NRV only; cost is ignored
• D. Inventory is measured at market value with adjustments

Answer: (A)

Under GAAP, inventory is measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business minus reasonably predictable costs of completion, disposal, and transportation. If the estimated NRV is less than cost, you write the inventory down to NRV, recognizing a loss in that period. Importantly, GAAP prohibits reversing a prior write-down if NRV later increases. If cost is lower than NRV, you keep the original cost.

This approach prevents overstating assets and ensures that the expense matches the period when the recoverable value declines. NRV reflects the actual amount the company expects to realize, not just market prices or replacement costs, which could be unrelated to the net proceeds from sale.