When the Lower of Cost or Market Rule Requires an Inventory

question 19

Multiple Choice

When the lower of cost or market rule requires an inventory adjustment,the:

• A) adjustment usually, but not always, reduces the book value of inventory.
• B) write-down is usually reported as a part of cost of goods sold.
• C) inventory adjustment is recorded in a contra-account called Inventory Allowances.
• D) write-down does not affect any of the financial statements.

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Definitions:

Price Ceiling

A government-imposed maximum price that can be charged for a good or service, intentionally set below the market equilibrium to protect consumers.

Shortage

A situation in which the demand for a good or service exceeds its supply in a market.

Price Floor

A minimum price set by the government or a regulatory body, below which a particular good or service cannot legally be sold.

Surplus

An excess quantity, especially referring to the situation where supply exceeds demand in a market, often leading to a decrease in prices.