Question

In the lower of cost or market rule, define the upper and lower constraints to market.

What is the major criticism of the lower of cost or market rule?

resource cited please thank you!

Answer 1

Answer 1

It is not possible for market value to be higher than net realizable value. Net realizable value = estimated selling price-estimated completion and disposal cost. This net realizable value is referred to as an upper or ceiling constraints to market. On the other hand, it is not possible for market value to be lesser than net realizable value minus net profit margin. Net realizable value minus net profit margin is referred to as a lower or floor constraints to market. It prevents the recognition of current excessive losses and future excessive profits.

Answer

Lack of consistency is the major criticism of the lower of cost or market rule. In some cases, either cost of unit or cost of replacement is used whereas in some cases either net realizable value or nrv minus net profit margin is used.