Under GAAP, inventory is valued using which method?

• A. Lower of Cost or Market
• B. FIFO
• C. LIFO
• D. Weighted Average Cost

Answer: (A)

Under GAAP, inventory is reported at the lower of cost or market. This means you compare the cost of the inventory (as determined by a cost-flow method like FIFO, LIFO, or weighted average) to its market value, and you record a write-down if market is lower. Market is generally the replacement cost, but it is constrained by a ceiling and floor (not higher than net realizable value and not lower than NRV minus a normal profit). If the market value later increases, GAAP typically does not allow reversing a prior write-down. The other options describe methods to assign cost to inventory, but the measurement basis required by GAAP is the lower of cost and market.