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 under any scenario when current replacement cost is less than cost.
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 less a normal profit margin.
C. Ending inventory will be correctly stated when (i) current replacement cost is less than cost and (ii) replacement cost is greater than net realizable value.
D. 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.

Answer 1

Under the policy of reporting unsold inventory at the lower of LIFO cost or market, the ending inventory will be correctly stated when the current replacement cost is less than cost and the replacement cost is less than net realizable value less a normal profit margin.

Step-by-step explanation:

The correct statement is 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 less a normal profit margin.

Under the policy of reporting unsold inventory at the lower of LIFO cost or market, the ending inventory is valued at the lower of the LIFO cost (the cost of the most recent purchases) or the current replacement cost, which is the cost to replace the inventory at the current market price. Additionally, the replacement cost must be less than the net realizable value (the estimated selling price of the inventory less any anticipated costs of completion and disposal) reduced by a normal profit margin.

If the current replacement cost is lower than the LIFO cost and the replacement cost is lower than the net realizable value less a normal profit margin, then the ending inventory will be correctly stated. This ensures that the inventory is not overstated and reflects a conservative approach to reporting.