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

Applying the lower of cost or market (LCM) rule results in inventory being reported at the:

higher of its historical cost or market value

original purchase price regardless of market value

average of its historical cost and market value

lower of its historical cost or market value

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Verified step by step guidance

Understand the concept of the lower of cost or market (LCM) rule: This accounting principle ensures that inventory is reported at the lower value between its historical cost (the original purchase price) and its current market value. This is done to prevent overstating the value of inventory on financial statements.

Identify the historical cost: The historical cost is the original purchase price of the inventory, which is recorded at the time of acquisition.

Determine the market value: The market value is the current replacement cost or net realizable value of the inventory, depending on the accounting standards being followed.

Compare the historical cost and market value: Evaluate both values and identify which one is lower. This comparison is the basis for applying the LCM rule.

Report the inventory value: Use the lower of the two values (historical cost or market value) to report the inventory on the financial statements, ensuring compliance with the LCM rule.