Why Are Inventories Stated at Lower-Of-Cost-Or-Net Realizable Value

question 18

Multiple Choice

Why are inventories stated at lower-of-cost-or-net realizable value?

• A) To report a loss when there is a decrease in the future utility.
• B) To be conservative.
• C) To report a loss when there is a decrease in the future utility below the original cost.
• D) To permit future profits to be recognized.

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Definitions:

Effective Tax Rate

The average percentage that companies or individuals pay in taxes on their total income.

Goodwill

An intangible asset representing the excess of purchase price over the fair market value of identifiable assets and liabilities acquired in a business combination.

Equity Method

An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and adjusted thereafter for the proportionate share of profit or loss and dividends received.

Impairment Loss

A decrease in an asset's net carrying value that exceeds the future recoverable amount.