Question

What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?

a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.
d. Prevents overstatement of the value of obsolete or damaged inventories.

Answer 1

The correct answer is letter "D": Prevents overstatement of the value of obsolete or damaged inventories.

Step-by-step explanation:

The lower-of-cost-or-market method values assets according to the lowest value possible choosing between the market value or the asset's historical cost. This accounting principle is useful to avoid exaggerating the value of obsolete or damaged assets the firm might have in stock.