Question

The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the

	a.	replacement cost.
	b.	net realizable value less normal profit margin.
	c.	selling price less costs of completion and disposal.
	d.	net realizable value.

Answer 1

Correct Answer:

Option(b) or net realizable value less normal profit margin is correct answer because the lower-of-cost-or-market method to inventory is the middle value and it is considered as difference between the net realizable value and normal profit.

Incorrect Answers:

Option(a) or replacement cost is incorrect answer because the lower-of-cost-or-market method to inventory is  difference between the net realizable value and normal profit.

Option(c) or selling price less costs of completion and disposal is incorrect answer because it is calculated by deducting the normal profit from the net realizable value.

Option(d) or net realizable value is incorrect answer because the lower-of-cost-or-market method to inventory is calculated as net realizable value minus normal profit.

So correct answer is option(b)