Question

Which U.S. GAAP principle or rule would apply if the net realizable value of a​ company's inventory is below its original​ cost? A. Historical cost principle B. Consistency principle C. ​Lower-of-cost-or-market rule D. Disclosure principle

Answer 1

Answer:

​Lower-of-cost-or-market rule

Explanation:

Inventory valuation method which apply the net realizable value of a​ company's inventory is below its original​ cost is Lower of cost or market rule. It requires a business to revalue its inventory to market value when net realizable value of the inventory is lower than it original cost. It results in the recording of loss due to undervaluation of closing inventory.

Answer 2

Answer:

C. ​Lower-of-cost-or-market rule

Explanation:

Under the U.S. GAAP, inventories valuation methods most encouraged are FIFO and weighted average.

For inventories value through either method, it is expected that the inventory will be carried at the lower of cost or market value where the market value is the estimated selling price of the item less the cost incurred in the sale process.

Hence the right answer is C. ​Lower-of-cost-or-market rule