If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required,which of the following effects will apply?
A)Net income will increase.
B)Gross margin will decrease.
C)Assets will decrease.
D)Ggross margin will decrease and assets will also decrease .

Question

Quizplus · Accepted Answer

The lower-of-cost-or-market rule requires a write-down entry when the market value of inventory falls below its cost. This write-down entry will decrease the value of inventory, which decreases assets. As a result, gross margin will decrease because cost of goods sold will increase due to the inventory write-down. Therefore, the correct choice is D, which indicates that both gross margin and assets will decrease. Net income is not affected directly by the write-down entry.

If a Firm Is Using the Lower-Of-Cost-Or-Market Rule and If