Question

Companies must ensure that they are reporting their inventory at ______ of cost or market.

1) lower
2) higher
3) either
4) both

Answer 1

Companies must report their inventory at the lower of cost or market value, as per GAAP. This accounting principle is adopted to ensure that inventory is not overvalued on financial statements.

Step-by-step explanation:

Companies must ensure that they are reporting their inventory at a lower cost or market. According to the Generally Accepted Accounting Principles (GAAP), when reporting inventory, if the market value of an item falls below its cost, companies are required to write down the value of the inventory to its market value, reflecting the lower of the two. This conservative approach to inventory valuation helps ensure that assets are not overstated on the financial statements. An exception to this would be if a company is using an alternative method like Last-In, First-Out (LIFO), which falls under a different set of rules.