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

question 83

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, unlike the direct method, reduces the value of inventory reported on the balance sheet.

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Definitions:

Equipment And Software

Tangible assets such as machinery and tools, and intangible assets like software, used in the operation of a business to produce goods or services.

Productive Capacity

The maximum output a company or economy can produce with its current resources, also reflecting the efficiency of production processes.

Financial Assets

Financial assets such as stocks and bonds are claims to the income generated by real assets or claims on income from the government.

Directly Contribute

To have a clear and straightforward impact on an outcome or result.