Question

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

a) valued at their selling price.

b) valued at their current cost.

c) not over-valued.

d) not under-valued.

Answer 1

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are not overvalued.

Inventories should be valued at lower of cost and net realisable value. It is followed under the conservatism principle. That is, all probable losses are recorded when they are discovered, while gains can only be recorded when they are fully realized.

The valuation of inventories at lower of cost and net realisable value is based on the view that no asset should be carried at a value which is in excess of the value realisable by its sale or use.

Therefore we couldn't say the lower of cost and net realizable value basis of valuing inventories ensures that inventories are valued at their selling price, valued at their current cost, not under valued.