In the context of inventory costing and asset impairment, the recoverability test compares:

• A. The asset's book value to its net realizable value.
• B. The asset's carrying amount to the sum of the expected future undiscounted cash flows from the asset.
• C. The asset's carrying amount to its fair market value.
• D. The asset's historical cost to its replacement cost.

Answer: (B)

Verified step by step guidance

1. Understand the concept of recoverability test: The recoverability test is used to determine whether an asset is impaired. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.
2. Identify the key comparison in the recoverability test: The test compares the asset's carrying amount (book value) to the sum of the expected future undiscounted cash flows generated by the asset.
3. Clarify the terms: The carrying amount refers to the value of the asset recorded on the balance sheet, while the expected future undiscounted cash flows represent the total cash inflows expected from the asset without applying a discount rate.
4. Eliminate incorrect options: The recoverability test does not compare the asset's book value to its net realizable value, fair market value, historical cost, or replacement cost. These comparisons are used in other contexts, such as inventory valuation or fair value assessments.
5. Conclude the correct comparison: The recoverability test specifically compares the asset's carrying amount to the sum of the expected future undiscounted cash flows to determine if impairment exists.