If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole.
A) $6,960
B) $7,700
C) $6,540
D) $7,280

Question

If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. 
A) $6,960 
B) $7,700 
C) $6,540 
D) $7,280

Quizplus · Accepted Answer

The lower-of-cost-or-market method means that the inventory is valued at the lower of its cost or its market value. From the given options, the market value is less than the cost of the inventory. Therefore, we need to use the market value to value the inventory. The market value of the inventory is the replacement cost, which is the cost to replace the inventory at the current market price.

Calculation: 
27 units x $180 = $4,860 (cost)
27 units x $250 = $6,750 (market value/replacement cost)

Since the market value of the inventory (i.e., $6,750) is lower than its cost (i.e., $4,860), the inventory should be valued at $6,540.

If a Company Values Inventory at the Lower of Cost