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 valuation, 'market' generally means:

the historical cost less accumulated depreciation

the expected selling price of the inventory

the current replacement cost, subject to a ceiling and a floor

the original purchase price of the inventory

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Verified step by step guidance

Understand the concept of the lower of cost or market (LCM) rule: This accounting principle is used to value inventory at the lower of its historical cost or market value to ensure that inventory is not overstated on the financial statements.

Define 'market' in the context of LCM: Market generally refers to the current replacement cost of the inventory, which is the cost to replace the inventory item in the current market conditions.

Recognize the constraints on 'market': The market value is subject to a ceiling (net realizable value, which is the estimated selling price minus costs to complete and sell) and a floor (net realizable value minus a normal profit margin). These constraints prevent overvaluation or undervaluation of inventory.

Compare 'market' to 'cost': The historical cost is the original purchase price of the inventory. The LCM rule requires comparing this cost to the market value (current replacement cost, subject to the ceiling and floor) and selecting the lower value for inventory valuation.

Apply the LCM rule: When valuing inventory, determine the historical cost and the market value (current replacement cost, adjusted for ceiling and floor). Use the lower of these two values to report the inventory on the financial statements.