The lower-of-cost-or-net realizable value rule for inventory:
A) States that inventory must be reported on the balance sheet at its current replacement cost
B) Must be applied to inventory on an item by item basis
C) Places losses from price declines in the period the goods are sold rather than in the period of the price decline
D) May cause inventory to be written up to an amount larger than historic cost
E) None of the above

Question

Quizplus · Accepted Answer

The lower-of-cost-or-net realizable value rule requires inventory to be reported at the lower of its historical cost or its net realizable value, not replacement cost, and it does not allow inventory to be written up above historical cost. It can be applied on an item-by-item basis, but it does not defer losses to the period of sale.

The Lower-Of-Cost-Or-Net Realizable Value Rule for Inventory