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

When applying the lower-of-cost-or-market (LCM) rule to inventory with more than two types, which of the following methods is most commonly used under U.S. GAAP?

Apply the LCM rule to the total inventory as a whole.

Apply the LCM rule to each individual inventory item separately.

Apply the LCM rule to groups of similar inventory items.

Apply the LCM rule only to finished goods inventory.

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Verified step by step guidance

Understand the lower-of-cost-or-market (LCM) rule: The LCM rule is a conservative accounting principle used to value inventory. It requires that inventory be reported at the lower of its cost or market value, ensuring that potential losses are recognized promptly.

Identify the methods mentioned in the problem: The problem lists four methods for applying the LCM rule: (1) applying it to the total inventory as a whole, (2) applying it to each individual inventory item separately, (3) applying it to groups of similar inventory items, and (4) applying it only to finished goods inventory.

Review U.S. GAAP guidelines: Under U.S. GAAP, the most commonly used method for applying the LCM rule is to evaluate each individual inventory item separately. This approach ensures the most accurate valuation of inventory and aligns with the principle of conservatism.

Compare the methods: While applying the LCM rule to the total inventory or groups of similar items may be simpler, these methods can lead to less precise valuations. Applying the rule only to finished goods inventory is not comprehensive and does not account for raw materials or work-in-progress inventory.

Conclude the correct method: Based on U.S. GAAP, the correct method is to apply the LCM rule to each individual inventory item separately, as this provides the most detailed and accurate valuation of inventory.