Question
What is the underlying rationale for the lower-of-cost-or-market rule?-the materiality constraint-the conservatism constraint-the economic entity assumption-the historical cost principle
Answer
The rationale for the lower-of-cost-or-market (LCM) rule is the conservatism constraint.
- Q: What is the lower-of-cost-or-market (LCM) rule? A: The lower-of-cost-or-market (LCM) rule is an accounting technique used to record the value of inventory. It compares the cost of the inventory to its current market value to determine the amount that can be recorded as an asset on a company's balance sheet.
- Q: What is the rationale for the LCM rule? A: The rationale for the LCM rule is the conservatism constraint, which requires accountants to report liabilities and expenses as soon as they are probable and to report assets and revenues only when they are certain. The LCM rule allows companies to adjust the value of their inventory to reflect any potential losses due to decreases in market value, which helps to avoid overstating the value of the inventory on the balance sheet.