Lower of Cost or Net Realizable Value Rule

Steps:

• Identify the accounting standard for inventory: under IFRS (IAS 2) and GAAP, inventory prevents overstatement of assets.
• Determine cost: includes purchase price, conversion costs, and other directly attributable costs.
• Calculate net realizable value (NRV): estimated selling price minus completion and disposal costs.
• Compare cost and NRV, selecting the lower to reflect conservative valuation.

Why the correct option is correct:

• IAS 2 requires inventory at the lower of cost and NRV to ensure assets are not carried above recoverable amounts, per the prudence principle.

Why the others are wrong:

• A: Cost alone ignores declines in value, violating conservatism.
• B: Higher of cost and NRV overstates inventory if NRV falls below cost.
• D: NRV alone ignores actual cost if NRV exceeds it, leading to overvaluation.

Final answer: C