Final answer:
A holding loss under the LCM rule is a financial adjustment made when the market value of inventory falls below its recorded cost, resulting in a write-down on the company's financial statements to reflect the lower market value.
Step-by-step explanation:
A holding loss under the Lower of Cost or Market (LCM) rule refers to the write-down of inventory on a company’s financial statements when the market value of the inventory falls below its recorded cost. This rule is an aspect of the conservatism principle in accounting, which demands recognition of potential losses promptly.
The loss is recognized on the income statement and reduces the ending inventory value on the balance sheet to reflect the lower market value. The LCM rule helps ensure that assets are not overstated on the financial statements.
An example of a holding loss would be if a company has a batch of goods that cost $50,000 to produce, but due to a decline in market prices, these goods are now valued at $40,000 on the market. The company would write down the inventory value by $10,000 as a holding loss.