Compared with a pure cost method,the lower-of-cost-or-market method reports less net income in the period of decline in the market value of the inventory and more net income in the period of sale.

Question

Quizplus · Accepted Answer

The lower-of-cost-or-market method values inventory at the lower of its cost or its market value. If the market value of inventory decreases below its cost, the inventory is written down to its market value, which results in lower net income in that period. However, if the market value increases or remains the same, the inventory is not written up to its market value and thus, results in higher net income in the period of sale. This is in contrast to the pure cost method, where inventory is valued at cost only and does not reflect any changes in market value.

Compared with a Pure Cost Method,the Lower-Of-Cost-Or-Market Method Reports Less