If a company writes down inventory using the lower of cost and net realizable value rule, which of the following statements is true?
A)A loss is recognized in the period when the market value falls below cost.
B)A loss is recognized in the period when the inventory is sold.
C)The inventory is carried on the balance sheet at its historical cost.
D)The company can write the inventory back up if its value recovers.

Question

Quizplus · Accepted Answer

With the lower of cost and net realizable value rule, a loss is recognized in the period when the market value falls below the cost. This means that if the value of the inventory on the market falls below its cost, the company will need to recognize a loss in that period. The inventory will then be recorded on the balance sheet at the lower value, either cost or net realizable value. The company cannot write the inventory back up if its value recovers.

If a Company Writes Down Inventory Using the Lower of Cost