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:

Cost of Goods Sold

The specific expenses directly tied to the manufacturing of products sold by a business, such as costs for materials and labor.

Percentage

A fraction or ratio expressed as a part of one hundred, used to describe proportions or compare values.

Retail Inventory Method

An accounting procedure for estimating inventory value by applying a percentage cost-to-retail price.

Inventory Value

The total cost or market value of all items held in inventory, including raw materials, work-in-progress, and finished goods.