Final answer:
Inventories are valued at the lower of cost or net realizable value for faithful representation and understandability in financial reporting. Faithful representation ensures an accurate reflection of cost, while understandability ensures that information is clear to users.
Step-by-step explanation:
The student has asked about the valuation of inventories at the lower of cost or net realizable value and which accounting characteristic is relevant: faithful representation or understandability. Inventories are a crucial part of a company's current assets, reflecting the goods that a business has produced but not sold.
They are valued at the lower of cost or net realisable value to prevent overstatement of asset value and income Faithful representation is relevant to the valuation of inventories at cost because it ensures that the financial statements accurately reflect the actual cost incurred to acquire the inventories.
Net realizable value is concerned with the estimate of the selling price in the ordinary course of business minus the estimated costs to complete and sell. Understandability is also relevant as this accounting aspect ensures that the information provided is comprehensible to users with a reasonable knowledge of business and economic activities.