Final answer:
Forecasts for inventory valuation considering lower of cost or market are adjusted in financial statements based on market conditions influenced by demand and supply dynamics, which can result in a higher cost of goods sold when market prices fall below production costs.
Step-by-step explanation:
The question relates to how forecasts of the following year can assist in the determination of inventory valuation based on the lower of cost or market (LCM) method. When market conditions indicate that the selling prices have fallen, perhaps due to shifts in demand and supply, businesses may need to value their inventory at market value, even if it falls below the cost of production. This adjustment will reflect in the financial statements, reducing the inventory value and increasing the cost of goods sold (COGS).
For instance, if there's an excess supply of steel, and its market price drops below production costs, a company holding steel inventory will have to write down its inventory to reflect the lower market price. Such adjustments are necessary to report the inventory realistically and avoid overstating assets and income. Moreover, understanding the present discounted value is crucial for businesses and governments alike since it allows for comparing present costs with the future benefits of investments, which also affects financial decisions and reporting.