GK
ACCOUNTING
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Cost and Sales Value
|
|
|
Sales Value and Profit
|
|
|
Cost and Net Realizable Value
|
|
|
Market Price and Replacement Cost
|
Detailed explanation-1: -When inventory is measured as the lower of cost or net realizable value, it is embracing the accounting principle of conservatism. Though NRV may be the most dramatically reduced valuation for inventory, the aim is to reduce the carrying value of goods to not overstate the income statement.
Detailed explanation-2: -Net realizable value (NRV) is the value for which an asset can be sold, minus the estimated costs of selling or discarding the asset. The NRV is commonly used in the estimation of the value of ending inventory or accounts receivable.
Detailed explanation-3: -So, net realizable value can only be used if it is lower than the inventory cost in the company’s balance sheet. If the market value is available, the company should give preference to that value for reporting purposes.