Lower-of-Cost-or-Market Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the lower-of-cost-or-market rule for these raw materials. The replacement cost of the raw materials is above the net realizable value, and both are below the original cost. Ogala uses the average cost inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period.

(a) (1) At which amount should Ogala’s raw materials inventory be reported on the balance sheet? Why?

(2) In general, why is the lower-of-cost-or-market rule used to report inventory?

(b) What would have been the effect on ending inventory and cost of goods sold had Ogala used the LIFO inventory method instead of the average-cost inventory method for the raw materials? Why?