Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that because of new technology the company could buy the same computer today for $600. How would the lower-of-cost-or-market rule affect the financial statements

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Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that because of new technology the company could buy the same computer today for $600. How would the lower-of-cost-or-market rule affect the financial statements

Decrease net income on the income statement

Decrease common stock reported on the balance sheet

Increase liabilities on the balance sheet

Increase stockholders' equity on the balance sheet

Answer : Decrease net income on the income statement

Explanation:

The cost price of the computer when the company bought them for the purpose of reselling them was $800 and the current market value of the computer now stands at $600 i. e the market value of the computer have dropped from $800 to $600 causing a loss of $200 in market value of the computer.

using The lower-of-cost-or-market rule would mean that a debit for expense loss will be recorded in the inventory value which will lead to decrease in net income on the income statement of the company

Decrease net income on the income statement.

Explanation:

Writing down of inventory to market price when market price is lower than cost a debit for expense is made to record loss in inventory value. Simultaneously Inventory value decreases. The recognition of loss of inventory will reduce the income since expense will be increased.