When the market value of inventory drops below the cost recorded in the financial records,applying the lower of cost or market (LCM)rule causes:
A) a decrease in cost of goods sold.
B) no change in net income, other things being equal.
C) a decrease in total assets.
D) an increase in net income.

Question

Quizplus · Accepted Answer

Applying the lower of cost or market (LCM) rule causes a decrease in total assets when the market value of inventory drops below the cost recorded in the financial records. This is because the inventory is written down to the lower market value, resulting in a decrease in total assets on the balance sheet. This adjustment does not affect cost of goods sold or net income, so choices A and D are incorrect. Choice B is also incorrect as the application of the LCM rule does cause a change in the value of inventory and therefore a change in total assets.

When the Market Value of Inventory Drops Below the Cost