44. In ne case can \"market\" in the lower-of estimated selling price in the ord

Question

44. In ne case can "market" in the lower-of estimated selling price in the ordinary eounse of ictable costs of completion and disposal ely normal profit magin. B) estimated selling price in the ordinary soure nnd predictable costs of completion and disposal, an allowance for an normal profit margin, and an adequate resarve for possible fiature lesses of business, less reasomably C) estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. estimated selling prise in the ordinary course of business. appro D) 45. If a unit of inventory has declined in value below eriginal cost, but the mardsen valac excecds net realizable value, the amount to be used for parposes of invemlory vati is A) B) market value. net realizable value. C) net realizable value less a normal profit margin. 1) original cost. in the same 46. During periods of rising prices, a perpetual inventory system would result dollar amount of ending inventory as a periodie inventory system under which of the following inventory cost flow methods? FIFQ LIFO Yes No No Yes A) Yes C) D) Yes properly included in the physical inventory results in A) an understatement of liabilities and an overstatement of owners' equity. B) an overstatement of assets and net income. C) an understatement of assets and net income. D) an understatement of cost of goods sold and liabilities and an overstatement of 47. The failure to record a purehase of merchandise on account even though the goods are assets

Explanation / Answer

The correct answer is ( c )     Estimated Selling Price in the ordinary course of business less reasonably predictable costs of completion and disposal.

To explain is better lets understand the method of Lower of cost or market Rule (LCM).

LCM is a popular method of valuing Inventory. As per this method Inventories are valued at lower of Historical cost of inventory or Market Value of the inventory as on date of balance sheet.

Under U.S. GAAP, inventories are reported at the lower of cost or market. Market is usually equal to replacement cost; however, market cannot be greater than net realizable value or less than net realizable value less a normal profit margin. Net realizable value is equal to the selling price less any completion costs and disposal (selling) costs .If market value (U.S. GAAP) is less than the inventory's carrying value, the inventory is written down and a loss is recognized in the income statement. If there is a subsequent recovery in value, no write-up is allowed under U.S. GAAP company will simply reports higher profit when the inventory is sold.

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