What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?
A) Prevents understatement of the inventory value.
B) Allows for a normal profit to be earned.
C) Allows for items to be valued at replacement cost.
D) Prevents overstatement of the value of obsolete or damaged inventories.

Question

Quizplus · Accepted Answer

The lower-of-cost-or-market method aims to prevent the overstatement of inventory value by ensuring that the reported amount does not exceed the market value, which helps in accurately reflecting the value of obsolete or damaged inventories.

What Is the Rationale Behind the Ceiling When Applying the Lower-Of-Cost-Or-Market