Current Generally Accepted Accounting Principles State That a Departure from the Cost

question 118

Essay

Current generally accepted accounting principles state that a departure from the cost basis of pricing inventory is required when the utility of the goods is no longer as great as its cost.Accordingly,the lower-of-cost-or-market rule is applied to inventories such that,if market is less than cost,an adjustment is made to record the loss and to restate ending inventory at the lower value.
What effect would the failure to apply the lower-of-cost-or-market method have on the income statement in current and future periods?

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Definitions:

Direct Method

A way of preparing the cash flow statement where actual cash flows from operating activities are reported instead of adjustments to net income.

Operating Activities

Business activities directly related to the production and delivery of goods and services, affecting the operating income.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, reflecting wear and tear or obsolescence.

Direct Method

A cash flow statement presentation that lists specific types of cash receipts and payments, used to reveal actual cash flow activities.