Question

The lower limit (floor) for inventory valuation is defined as the selling price less:

A. estimated costs of completion and disposal and a normal profit margin.
B. estimated costs of completion and disposal.
C. the net realizable value.
D. a normal profit margin.

Answer 1

The lower limit (floor) for inventory valuation is defined as the selling price less the estimated costs of completion and disposal and a normal profit margin.

Step-by-step explanation:

The lower limit (floor) for inventory valuation can be defined by the formula: selling price less estimated costs of completion and disposal and a normal profit margin. This establishes the minimum amount at which inventory can be reported on the financial statements, ensuring that the reported amount is not overstated, which is important for providing a true and fair view of the company's financial position. The concept is grounded in prudent accounting practices, and it aligns with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the regulatory environment. It is closely related to net realizable value, which is the estimated selling price in the ordinary course of business, minus the estimated costs of completion and disposal.