What occurs when a company uses the lower cost or market rule to report inventory at replacement cost?

Study for the CMRP Exam. Prepare with flashcards and multiple choice questions, each with hints and explanations. Get ready with us!

When a company reports inventory using the lower of cost or market rule, it evaluates the market value of the inventory against the cost of that inventory to determine the value at which the inventory should be reported on the financial statements. Market value is typically defined as the replacement cost, but it is also constrained by the ceiling (net realizable value) and floor (net realizable value less a normal profit margin).

The correct answer states that the net realizable value is greater than replacement cost. This situation indicates that while the company can replace the inventory at a lower cost, the potential selling price of that inventory remains higher. As a result, the inventory will be reported at the replacement cost since it is lower than the net realizable value. This action helps accurately reflect the inventory's value on financial statements, ensuring that assets are not overstated, and aligns with conservative accounting principles to prevent overvaluation.

In the context of other options, if the replacement cost exceeds the net realizable value, that situation would necessitate reporting inventory at the net realizable value instead of the replacement cost, which is not the case here. Moreover, stating that replacement cost is always used as the market value ignores the limitations imposed by net realizable value, and saying that net

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