The inventory costing method a company chooses can affect the financial statements and, thus, the decisions of the people who use those statements.
Requirements
1. The lower-of-cost-and-net-realizable-value rule is an accepted accounting concept. Would you want management to follow this rule in accounting for inventory if you were a shareholder or a creditor of a company? Give your reason.
2. Super Sports Company follows the lower-of-cost-and-net-realizable-value rule (LCNRV) and writes the value of its inventory of tents down to net realizable value, which has declined below cost. The following year, an unexpected camping craze results in a demand for tents that far exceeds supply, and the net realizable value increases above the previous cost. What effect will the LCNRV rule have on the income of Super Sports over the two years?