Final answer:
The inventory write-down is a loss recognized when inventory's market value falls below its cost, and it is written down to its net realizable value, affecting both the balance sheet and income statement.
Step-by-step explanation:
The inventory write-down incurred from applying the lower of cost and net realizable value rule to inventory is a loss that is recognized when the market value (net realizable value) of the inventory falls below its cost. When this situation occurs, the inventory is written down to its net realizable value on the balance sheet, and the amount of the write-down is recorded as an expense on the income statement. This ensures that the inventory is not reported at an amount greater than what it is expected to realize upon sale.
For example, if a company has an inventory item that cost $100 and its current net realizable value is $90, an inventory write-down of $10 will be recorded to align the inventory's carrying amount with its net realizable value.