The allowance method and the direct reduction method of reporting the holding losses on lower-of-cost or NRV inventory valuation will produce the same cost of goods sold amount.

Question

Quizplus · Accepted Answer

The two methods will not produce the same cost of goods sold amount. The allowance method will result in a lower cost of goods sold than the direct reduction method because it only recognizes a holding loss when it is incurred, while the direct reduction method recognizes the loss immediately.

The Allowance Method and the Direct Reduction Method of Reporting