Which of the following statements relating to the lower of cost and net realisable value rule is incorrect?
A) The rule is based on the accounting principle of prudence (conservatism).
B) It results in probable losses being recorded in the period when they are first noticed rather than when the sale occurs.
C) The gross profit reported in the period when the rule is applied is higher than it otherwise would be.
D) The rule is applied separately to each item of inventory or to each group of inventory.

Question

Quizplus · Accepted Answer

The lower of cost and net realisable value rule results in a lower reported gross profit in the period when it is applied because it recognizes the lower net realisable value as the cost of goods sold, reducing the gross profit.

Which of the Following Statements Relating to the Lower of Cost