Question

The balance sheet valuation of inventories is:

1) lower of cost or market.
2) lower of selling price or cost.
3) lower of realizable value or selling price.
4) cost, regardless of the cost of replacing the inventory.

Answer 1

The Correct option is 1). The correct valuation method for inventories on the balance sheet is the 'lower of cost or market' approach, which ensures that inventory is not overstated on financial statements.

Step-by-step explanation:

In accounting, when valuing inventories on the balance sheet, the principle used is the lower of cost or market method. This conservative approach ensures that the inventory is not overstated by requiring that it be recorded at the lesser of what it cost to produce or purchase or its current market price. This helps to avoid overstating assets and earnings if the market value declines beneath the cost, reflecting potential losses in advance. It's a recognized principle in both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).