Question

When inventories go down in value, accountants adjust the value of the inventory that is recorded on the balance sheet. Sometimes inventory goes up in value. Do accountant's ever adjust the value of inventory upwards? What are the general guidelines that accountant's follow in recording inventory value?

Answer 1

Answer:

Accountants do not adjust the value of inventory upwards.  The general guidelines in recording inventory value are to recognize the ending inventory value at the lower of cost or market value and to ensure that transactions are recorded in accordance with the conservatism principle of generally accepted accounting principles.

Explanation:

The conservatism principle requires that all probable losses are recognized as soon as they can be reasonably estimated, while gains should be recognized only when they are fully realized.  The lower of cost or market value (LCM) method states that inventory should be recorded at the lower of either the historical cost or the market value.  The LCM is in line with the conservatism principle.