When the replacement cost of inventory drops below the cost recorded in the financial records,applying the lower of cost or market (LCM)rule causes:
A)a decrease in cost of goods sold.
B)no change in net income,other things being equal.
C)a reduction in the book value of total assets.
D)an increase in net income.

Question

Quizplus · Accepted Answer

When applying the lower of cost or market (LCM) rule, if the replacement cost of inventory drops below the cost recorded in the financial records, the inventory value is reduced to the lower market value. This leads to a reduction in the book value of inventory, which, in turn, decreases the book value of total assets. This reduction in the value of assets does not affect net income, and therefore, there is no change in net income, other things being equal.

When the Replacement Cost of Inventory Drops Below the Cost