When applying the lower-of-cost-or-market rule, market value generally refers to:

Question

Quizplus · Accepted Answer

When applying the lower-of-cost-or-market rule, market value generally refers to the current replacement cost, which is the cost a company would incur to replace the inventory with the same or similar goods. This approach is used to avoid overstating the value of inventory on the balance sheet, which could lead to mismatches between carrying value and market value, potentially yielding misleading financial ratios and metrics. By using the lower-of-cost-or-market rule, companies can ensure that inventory values are reported at their most conservative levels.

When Applying the Lower-Of-Cost-Or-Market Rule, Market Value Generally Refers To