Asked by Christian Poncio on Jun 26, 2024
Verified
When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because
A) the allowance method reports smaller losses than the direct method
B) the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method
C) the allowance method reports the inventory loss or loss recovery in a separate income statement account
D) the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of the balance sheet
Allowance Method
An accounting technique used to estimate and account for doubtful debts, reducing accounts receivable to a realistic amount.
Direct Method
A way of presenting the cash flow statement where actual cash flows from operating activities are listed directly.
Inventory Loss
A reduction in inventory count due to theft, spoilage, or other discrepancies not related to sales.
- Determine and employ the correct technique for valuing inventory under LCM: direct and allowance methods.
- Identify the consequences of employing the lower of cost or market approach on financial statements.
Verified Answer
Learning Objectives
- Determine and employ the correct technique for valuing inventory under LCM: direct and allowance methods.
- Identify the consequences of employing the lower of cost or market approach on financial statements.
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