Under US GAAP, what inventory valuation rule requires inventory to be reported at the lower of its cost or its market value?

Under US GAAP, the traditional inventory valuation rule is lower of cost or market.

The rule prevents inventory from being carried above an amount supported by current economic conditions. “Cost” reflects the amount recorded to acquire or produce the goods, while “market” traditionally refers to a replacement-cost concept subject to a ceiling of net realizable value and a floor of net realizable value less a normal profit margin.

The answer has an important modern US GAAP nuance. For inventory measured using LIFO or the retail inventory method, lower of cost or market remains the applicable approach. For most other inventory, including inventory commonly measured using FIFO, US GAAP generally uses lower of cost and net realizable value instead, following the FASB’s 2015 simplification.

That change does not make the quiz answer wrong: “lower of cost or market” is the named traditional rule described in the question and remains applicable in specified cases. FIFO, LIFO, and weighted average are cost-flow methods, not valuation rules by themselves.