An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim reporting, the dollar amount of net inventory should:
A) decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery.
B) decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.
C) not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline.
D) not be affected in either the first quarter or the third quarter.

Question

Quizplus · Accepted Answer

In interim financial reporting, when an inventory loss is recognized due to a market price decline, the inventory value is decreased. If the market price recovers within the same fiscal year, the inventory value can be increased up to the amount of the previous decrease. This means the inventory value can be restored to its original level before the loss but not beyond that, aligning with the principle of conservatism in accounting.

An Inventory Loss from a Market Price Decline Occurred in the First