Question

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

A. $102
B. $106
C. $104
D. $110

Answer 1

Answer:

C) $104

Explanation:

The lower of cost or market approach states that a company must record its merchandise inventory at the lowest cost between the replacement cost and the net realizable value.

net realizable value = selling price - selling costs = $110 - $6 = $104

replacement cost = $106

In this case the net realizable value is lower than the replacement cost.