Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Lower of Cost or Market

Financial Accounting

5. Inventory

Lower of Cost or Market

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Multiple Choice

The lower of cost or market basis of valuing inventories is an example of which accounting principle?

Matching

Consistency

Conservatism

Materiality

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Verified step by step guidance

Understand the concept of the 'lower of cost or market' (LCM) method: This approach is used to value inventory at the lower of its historical cost or current market value, ensuring that assets are not overstated.

Identify the accounting principle associated with the LCM method: The principle of Conservatism guides accountants to choose the option that results in lower profits or asset values when faced with uncertainty, avoiding overstatement of financial position.

Review the other principles mentioned in the problem: Matching relates to recognizing expenses in the same period as the revenues they help generate, Consistency ensures uniform application of accounting methods over time, and Materiality focuses on the significance of financial information.

Compare the principles: The LCM method aligns with Conservatism because it prioritizes caution and avoids overstating inventory values, which could mislead stakeholders.

Conclude that the correct principle is Conservatism, as it directly supports the rationale behind the lower of cost or market basis for inventory valuation.