In Chapter 1, we learned that the cost concept requires that all items to be recorded...
In Chapter 1, we learned that the cost concept requires that all items to be recorded at cost, but in this chapter, we learned that inventory can be written down to current replacement cost or net realizable value. Why do you think the accounting profession has decided to violate this cost concept and reduce the value of inventory in certain circumstances?
Can you give an example of another type of account (besides inventory) that is adjusted and for what reason would it be adjusted?
Homework Answers
Inventory is valued at lower of cost or net realizable value because accounting bodies across the globe wanted inventories to be shown at Fair Market Value. Fair market value gives the true and fair value of inventory and thus making financial statements better tool of analysis for stakeholders.
Temporary investments can also be shown at the lower of cost or net realizable concept in order to adjust any fluctuation in the market value of investments and follow conservative principle to avoid reporting the unrealized profit.
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