Question

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are :

a. not undervalued.
b. valued at their current cost.
c. valued at their selling price.
d. monitored on an ongoing basis as to their value relative to their cost.

Answer 1

Valuing inventories on the lower of cost and net realizable value basis ensures they are monitored in relation to their cost, with adjustments made when market conditions cause the value to decline below the cost.

Step-by-step explanation:

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are d. monitored on an ongoing basis as to their value relative to their cost. This accounting principle dictates that inventory should be reported at the lower of its historical cost or the net amount that can be realized from its sale, which is the net realizable value. The approach is conservative and prevents the overstatement of the inventory's value on the balance sheet. If the market conditions decline, and the net realizable value of the inventory falls below its cost, the inventory must be written down to this lower value.