Question

The situation that requires a departure from the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is necessitated by Select one: a. an increase in selling price. b. a decline in the value of the inventory. c. an increase in the value of the inventory. d. a desire for more profit.

Answer 1

Answer:

B. A decline in the value of the inventory.

Explanation:

Cost basis accounting: It is a method of calculating the value of inventory on actual cost for tax purposes as the purchase price is adjusted for dividends and return of capital distribution. It uses lower of cost either original cost or current market price. The market price should not be less or more than the net realizable value. Net realizable value is defined as the selling price minus cost of completion. Therefore, the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is necessitated by a decline in the value of the inventory.