Asked by Christian Poncio on Jun 26, 2024

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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.
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SJ
somaya jannatJun 29, 2024
Final Answer :
C
Explanation :
The allowance method reports the inventory loss or loss recovery in a separate income statement account, which provides better transparency and disclosure for financial statement users. The direct method, on the other hand, simply reduces the inventory value on the balance sheet without providing any information about the cause of the write-down. Therefore, the allowance method is considered preferable for inventory valuation.