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

Question

Quizplus · Accepted Answer

The correct statement is that the gross profit reported in the period when the rule is applied is lower than it otherwise would be. This is because when the lower of cost and net realisable value rule is applied, the cost of inventory is reduced to its net realisable value, resulting in a lower gross profit.

Which of the Following Statements Relating to the Lower of Cost