Question

For companies that use LIFO, how is inventory valued at the end of the reporting period?

1) At the lower of cost or net realizable value
2) At the higher of cost or net realizable value
3) At the average cost
4) At the market value

Answer 1

For companies using LIFO, inventory is valued at the end of the reporting period 1) at the lower of cost or net realizable value, following the LIFO conformity rule to ensure inventory is not overstated on the financial statements.

Step-by-step explanation:

For companies that use Last-In, First-Out (LIFO), inventory is valued at the end of the reporting period 1) at the lower of cost or net realizable value.

This accounting method is based on the assumption that the last items of inventory purchased are the first ones to be used or sold.

It reflects the financial principle known as the LIFO conformity rule, where inventory and cost of goods sold (COGS) are recorded at the lower of cost or the net realizable value.

This valuation ensures that if the market value of the inventory falls below the cost at which it was purchased, the inventory is written down to represent the lesser value.

Hence, during times of increasing prices, LIFO can result in lower-ending inventory values on the balance sheet and higher COGS on the income statement, which may reduce taxable income.