The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required when:
A) The general price level has changed materially.
B) The FIFO method of inventory valuation is adopted.
C) There is evidence that the replacement cost of the goods at the date they are sold will be less than their cost when purchased.
D) There is evidence that the net realizable value of the goods has declined.

Question

Quizplus · Accepted Answer

When there is evidence that the net realizable value of the goods has declined below their cost, a departure from the cost basis of pricing the inventory is needed. This could happen due to factors such as damage, obsolescence, changes in demand for the product, etc. In such cases, the inventory should be valued at the lower of cost or net realizable value. Choices A and B are not relevant to departures from the cost basis of inventory pricing, while choice C is incorrect as replacement cost is only considered when valuing inventory using the lower of cost or market (LCM) method.

The Primary Basis of Accounting for Inventories Is Cost