O Level Accounting (7707)•7707/12/M/J/24
Explanation
Inventory Valuation: Lower of Cost or Net Realizable Value
Steps:
- Determine cost of goods: $1000 purchase price.
- Estimate net realizable value (NRV): $600, the expected selling price for damaged goods.
- Compare cost and NRV: 600, so use the lower value.
- Value inventory at $600 in financial statements.
Why B is correct:
- Accounting standards (e.g., IAS 2 or conservatism principle) require inventory to be stated at the lower of cost or NRV to avoid overstating assets.
Why the others are wrong:
- A. $500: Understates value with no supporting calculation or evidence.
- C. $750: Incorrect midpoint; ignores the strict lower-of-cost-or-NRV rule.
- D. 1000 + 25% markup), not allowable for damaged inventory.
Final answer: B
Topic: Valuation of inventory
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