In Comparison to the Allowance Method of Applying the Lower

question 14

Multiple Choice

In comparison to the allowance method of applying the lower of cost or market rule to the valuation of inventory, the direct method has which of the following deficiencies?

• A) The direct method reports a more conservative amount for net income.
• B) For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of goods sold amount.
• C) The direct method makes changes to the historical cost of inventory reported on the balance sheet.
• D) The direct method can only be used with a perpetual inventory system.