Identify the statement relating to the lower of cost and net realisable value rule that is untrue.
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 prudence (conservatism).
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 groups of inventory.

Question

Quizplus · Accepted Answer

The lower of cost and net realisable value rule ensures that inventory is written down to its estimated selling price if it falls below its cost. As such, it results in probable losses being recorded in the period when they are first noticed rather than when the sale occurs, which is in line with the principle of prudence. The rule is applied separately to each item of inventory or to groups of inventory. However, applying the rule typically results in a lower gross profit being reported in the period when it is used, as the cost of goods sold is increased due to the write-down of inventory.

Identify the Statement Relating to the Lower of Cost and Net