Why are inventories stated at lower-of-cost-or-market?
A) To report a loss when there is a decrease in the future utility.
B) To keep track of the market value of the inventory.
C) To report a loss when there is a decrease in the future utility below the original cost.
D) To permit future profits to be recognized.

Question

Quizplus · Accepted Answer

Inventories are stated at lower of cost or market to report a loss when there is a decrease in the future utility below the original cost. This is in accordance with the conservatism principle in accounting, which requires losses to be recognized when they are probable and not offset by expected gains. It ensures that inventory values are not overstated and future profits are not recognized before they are realized.

Why Are Inventories Stated at Lower-Of-Cost-Or-Market