CFP Certified Financial Planner Test Prep

Answer - B - The upper ceiling for the replacement cost in the lower of cost or market (LCM) rule is the net realizable value less the normal profit.

Key Takeaway: The ceiling and floor exist in the lower of cost or market rule to prevent inventory from exceeding the net selling price or being less than net selling price less a normal profit margin. The ceiling covers obsolete or damaged inventory and prevents inventory from being overstated and loss from being understated in the current period. The floor prevents understatement of inventory and overstatement of loss.