Why Do Accountants Criticize the Practice of Carrying Inventories at Estimated

question 63

Multiple Choice

Why do accountants criticize the practice of carrying inventories at estimated net realizable values?

• A) The costs of producing the products are usually estimates.
• B) There is usually no clearly defined realizable value for any inventories.
• C) In effect, this practice recognizes income before sales are made.
• D) It will result in higher cost of goods sold and lesser profits.

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Definitions:

After-Tax Discount Rate

The discount rate used in investment analysis that has been adjusted to account for the effects of taxes, providing a more accurate measure of net present value or internal rate of return.

Straight-Line Depreciation

A plan for breaking down the cost of a concrete asset across its useful life in equivalent annual installments.

Initial Investments

refers to the upfront capital put into a project or business, marking the beginning of financial commitment.

After-Tax Discount Rate

The discount rate that reflects the net cost of investment after accounting for the tax implications.