Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Lower of Cost or Market

Financial Accounting

5. Inventory

Lower of Cost or Market

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Multiple Choice

Companies must ensure that they are reporting their inventory at the lower of cost or market. What does this principle require?

Inventory should be reported at the lower value between its historical cost and current market value.

Inventory should always be reported at its historical cost, regardless of market changes.

Inventory should be reported at its replacement cost only.

Inventory should be reported at the higher value between its historical cost and current market value.

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Verified step by step guidance

Understand the principle of 'Lower of Cost or Market' (LCM): This accounting principle requires companies to report inventory at the lower value between its historical cost (the original purchase price) and its current market value (the cost to replace or sell the inventory). This ensures that inventory is not overstated on the financial statements.

Identify the historical cost: Determine the original purchase price of the inventory, which includes the cost of purchase, shipping, and any other costs necessary to bring the inventory to its current condition and location.

Determine the current market value: Assess the current market value of the inventory, which is typically the replacement cost. However, market value is subject to certain constraints, such as being no higher than the net realizable value (selling price minus costs to complete and sell) and no lower than the net realizable value minus a normal profit margin.

Compare the historical cost and the market value: Once both values are determined, compare them to identify which is lower.

Report the inventory value: Use the lower of the two values (historical cost or market value) to report the inventory on the balance sheet. This ensures compliance with the LCM principle and prevents overstatement of assets.