Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing.

Ogala uses the LCNRV rule for these raw materials. The net realizable value of the raw materials is below the original cost.

Ogala uses the FIFO inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period.

Instructions

(a) (1) At which amount should Ogala’s raw materials inventory be reported on the statement of financial position? Why?

(2) In general, why is the LCNRV rule used to report inventory?

(b) What would have been the effect on ending inventory and cost of goods sold had Ogala used the average-cost inventory method instead of the FIFO inventory method for the raw materials? Why?