Lower of Cost or Market (LCM) | Intermediate Accounting | CPA Exam FAR | Chp 9 p 1

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Farhat's Accounting Lectures
Published at : 11 Dec 2020
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In this session, I explain lower of cost or market. The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price.The lower of cost or market (LCM) method states that when valuing a company's inventory, it is recorded on the balance sheet at either the historical cost or the market value. Farhat Accounting Lectures can help you understand lower of cost or market.

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#CPAEXAM #lowerofcostormarket #intermediateaccounting

Inventories are recorded  at  their  cost.  However,  if  inventory  declines  in  value below its original cost, a major departure from the historical cost principle occurs. Whatever the reason for a decline a company should write down the inventory to net realizable value to report this loss.   The term net realizable value (NRV) refers to the net amount that a company expects to realize from the sale of inventory. Specifically, NRV is the estimated selling price in the ordinary  course of business, less reasonably predictable costs of completion, disposal, and transportation. 
  Companies may apply the LCNRV rule either directly to each item, to each category, or to the total  of the  inventory. If  a  company follows  a major  category  or total  inventory  approach  in applying the  LCNRV  rule,  increases  in  selling  prices tend to  offset  decreases  in  selling  prices. 
Companies  usually  price  inventory  on  an  item­ by ­item  basis.  In  fact,  tax  rules  require  that companies use an individual item approach barring practical difficulties. In addition, the individual item approach  gives  the  most  conservative  valuation  for  balance  sheet  purposes. 
Whichever method a company selects, it should apply the method consistently from one period to another.
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