The lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application gen... Accounting MCQs | Accounting MCQs

The lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?

All applications result in the same amountTotal inventory.Groups of similar items.Separately to each item.Show Result

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Detailed Answer

Answer (D) is correct. Applying the LCM rule to each item of inventory produces the lowest amount for each item and therefore the lowest and most conservative measurement for the total inventory. The reason is that aggregating items results in the inclusion of some items at amounts greater than LCM. For example, if item A (cost $2, market $1) and item B (cost $3, market $4) are aggregated for LCM purposes, the inventory measurement is $5. If the rule is applied separately to A and B, the LCM measurement is $4.