Q. Explain about lower-of-cost-or-market method?
The lower-of-cost-or-market (LCM) method is the inventory costing method that values inventory at the lower of its historical cost or its current market (replacement) cost. The term cost refers to historical cost of inventory as determined under the specific identification LIFO, FIFO or weighted-average inventory method. Market in general refers to a merchandise item's replacement cost in the quantity usually purchased. The basic supposition of the LCM method or process is that if the purchase price of an item has fallen its selling price as well has fallen or will fall. The LCM process has long been accepted in accounting. In LCM inventory items are written down to market value when the market value is less than the cost of the items. For instance assume that the market value of the inventory is USD 39600 and its cost is USD 40000. Afterwards the company would record a USD 400 loss because the inventory has lost some of its revenue-generating ability. The company should recognize the loss in the period the loss occurred. On the other hand if ending inventory has a market value of USD 45000 as well as a cost of USD 40000 the company wouldn't recognize this increase in value. To do so would recognize revenue prior to the time of sale.