Merchandise inventory: Lower of cost or market method
The lower of cost or market method (LCM) states that if prices fall on inventory items, a loss should be recognized in the period of the decline in price. Market is defined as the replacement cost of the inventory item. If the replacement cost of inventory falls below the cost, we write the inventory down to the market value. If the replacement cost is above the cost of inventory, then nothing is done. The lower of cost or market method can be applied to inventory items individually, to each category of inventory, or to total inventory.
Each item of inventory:
For this exercise, each inventory item is examined individually. Under the lower of cost or market method, the cost of each item is compared with the market value of each item. The lower of cost or market is then recorded in the LCM column in the worksheet below. The total column is simply the quantity multiplied by LCM of each item. The grand total at the bottom of the total column is the value of the merchandise inventory that appears on the balance sheet. The results are listed below:
|Thus, the cost of ending inventory is $18,260.|