If a company is too conservative, and records too large an adjustment for a "lower of cost or market" adjustment in one period, then its income in later periods will be reduced when the estimation error is corrected.

Question

Quizplus · Accepted Answer

If a company records too large an adjustment for a "lower of cost or market" in one period, it will actually increase income in later periods when the estimation error is corrected, because the reversal of the excessive write-down would result in recognizing higher income than if the adjustment had been accurately estimated initially.

If a Company Is Too Conservative, and Records Too Large