Economics · Accounting Principles and Inventory Valuation
A business using the FIFO method for inventory valuation operates in a period of consistently rising purchase prices. At its year-end, a specific line of inventory with a cost of $1,000 has a net realisable value (NRV) of $950. The accountant values this item at its cost of $1,000, assuming the difference is immaterial. Which statement correctly describes the impact of this error on the financial statements and the correct valuation required by accounting standards?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The company's profit for the year is overstated, and the inventory should be valued at $1,000.
- 2The company's profit for the year is understated, and the inventory should be valued at $1,000.
- 3The company's profit for the year is overstated, and the inventory should be valued at $950.✓
- 4The company's profit for the year is understated, and the inventory should be valued at $950.
Correct answer
The company's profit for the year is overstated, and the inventory should be valued at $950.
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