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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Which of the following statements regarding the lower of cost or market (LCM) rule is true?

a. The LCM rule is an application of the historical cost principle.

b. When the net realizable value of inventory drops below the historical cost of inventory, an adjustment is made to decrease inventory to its market value and decrease income.

c. If a company uses the LCM rule, there is no need to use a cost flow assumption such as FIFO, LIFO, or average cost.

d. When the net realizable value of inventory is above the historical cost of inventory, an adjustment is made to increase inventory to its market value and increase income.

To determine

Concept introduction:

Lower of Cost or market value method:

Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.

To choose:

The true statement regarding the lower of cost or market (LCM) rule.

Explanation

Explanation for Correct answer:

b. When the net realizable value of inventory drops below its cost, there is an adjustment is made in the inventory cost to bring it down to the net realizable value.

Hence this is the correct option.

Explanation for incorrect answers:

a. LCM rule does not follow the historical cost principle...

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