When Applying the Lower of Cost or Market Rule to the Valuation

question 21

Multiple Choice

When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because

• A)the allowance method reports smaller losses than the direct method
• B)the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method
• C)the allowance method reports the inventory loss or loss recovery in a separate income statement account
• D)the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of the balance sheet

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Definitions:

Dishabituation

The recovery of a habituated response as the result of the presentation of a sensitizing stimulus

Sensitization

An increased reaction to a stimulus following repeated exposure, particularly to something intense or adverse.

Habituation

The process by which a person or animal becomes accustomed to a stimulus after repeated exposure, leading to a decrease in response.

Higher-order Conditioning

A classical conditioning process where a conditioned stimulus is paired with a neutral stimulus to elicit a conditioned response without the need for the original unconditioned stimulus.