The lower cost or market rule for inventories produces the lowest inventory amount when applied how?

The lower cost or market rule for inventories produces the lowest inventory amount when applied how?

• A. To each inventory category as a whole
• B. To each item separately
• C. To the average inventory
• D. To a mix of old and new items

Answer: (B)

The lower cost or market rule for inventories stipulates that inventory should be reported at the lower of its cost or market value. When applying this rule to each item separately, it allows for a more precise calculation of inventory value, as it considers the potential depreciation and market changes affecting individual items. This method ensures that any write-downs for items that may be unsalable or whose market value has dropped are accurately reflected. By evaluating each item on its own, the assessment can capture any unique circumstances, resulting in a lower total inventory value if certain items are closer to their market value compared to their acquisition costs. This method is particularly useful in industries with diverse inventories where some items may be more affected by changes in demand or market conditions than others. It also mitigates the risk of overstating the financial position of a company by ensuring that inventory values on the balance sheet are conservative and reflect current market conditions.

The lower cost or market rule for inventories stipulates that inventory should be reported at the lower of its cost or market value. When applying this rule to each item separately, it allows for a more precise calculation of inventory value, as it considers the potential depreciation and market changes affecting individual items. This method ensures that any write-downs for items that may be unsalable or whose market value has dropped are accurately reflected.

By evaluating each item on its own, the assessment can capture any unique circumstances, resulting in a lower total inventory value if certain items are closer to their market value compared to their acquisition costs. This method is particularly useful in industries with diverse inventories where some items may be more affected by changes in demand or market conditions than others. It also mitigates the risk of overstating the financial position of a company by ensuring that inventory values on the balance sheet are conservative and reflect current market conditions.