Question

Management has adopted a policy of reporting its unsold inventory at the end of each year at the lower of LIFO cost or market. which of the following statements is correct?

A. Ending inventory will be correctly stated when (i) current replacement cost is less than cost and the replacement cost is greater than net realizable value
B. Ending inventory will be correctly stated when (i) current replacement cost is less than cost and (ii) replacement cost is less than net realizable value and greater than net realizable value reduced by an allowance for an approximately normal profit margin.
C. Ending inventory will be correctly stated when (i) current replacement cost is less than cost and (ii) replacement cost is less than net realizable value less a normal profit margin.
D. Ending inventory will be correctly stated under any scenario when current replacement cost is less than cost.

Answer 1

The correct statement for ending inventory to be reported under the Lower of Cost or Market rule is when the current replacement cost is less than cost and happens to be lower than the net realizable value but higher than the net realizable value less a normal profit margin . option B is correct answer.

Step-by-step explanation:

The concept in question relates to inventory valuation, which is a significant topic in financial accounting. The Lower of Cost or Market (LCM) rule states that inventory should be reported at the lower of either the historical cost or the current market value. This helps to ensure that the inventory is not overstated on the financial statements.

Looking at the options provided, the correct ending inventory will be correctly stated with respect to the LCM rule under the following conditions:

• Current replacement cost is less than the original cost (LIFO cost).
• The replacement cost is also less than the net realizable value (NRV).
• The replacement cost is higher than NRV reduced by an allowance for a normal profit margin.

Therefore, the correct option is B. This is because Inventory should be valued at the lower end but not below the net realizable value less a normal profit margin, which is considered the floor. The current replacement cost acts as the ceiling when it's less than the LIFO cost, and it should not be less than the floor, which is the NRV less the normal profit margin.