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Generally accepted accounting principles, known as GAAP, require that inventories be carried on the balance sheet at lower-of-cost-or-market. Lower-of-cost-or-market represents a departure from the historical cost concept, but is considered a conservative accounting measure. | Inventories: Additional Issues 9 Chapter 9: Inventories: Additional Issues. Learning Objective Understand and apply the lower-of-cost- or-market rule used to value inventories. LO1 Our first learning objective in Chapter 9 is to understand and apply the lower-of-cost-or- market rule used to value inventories. Lower of Cost or Market (LCM) GAAP requires that inventories be carried at cost or current market value, whichever is lower. LCM is a departure from historical cost and is a conservative accounting method. Generally accepted accounting principles, known as GAAP, require that inventories be carried on the balance sheet at lower-of-cost-or-market. Lower-of-cost-or-market represents a departure from the historical cost concept, but is considered a conservative accounting measure. We will refer to lower-of-cost- or-market by using the term LCM. Determining Market Value Net Realizable Value (Ceiling) Net Realizable Value less Normal Profit (Floor) Market value is NOT necessarily the . | Inventories: Additional Issues 9 Chapter 9: Inventories: Additional Issues. Learning Objective Understand and apply the lower-of-cost- or-market rule used to value inventories. LO1 Our first learning objective in Chapter 9 is to understand and apply the lower-of-cost-or- market rule used to value inventories. Lower of Cost or Market (LCM) GAAP requires that inventories be carried at cost or current market value, whichever is lower. LCM is a departure from historical cost and is a conservative accounting method. Generally accepted accounting principles, known as GAAP, require that inventories be carried on the balance sheet at lower-of-cost-or-market. Lower-of-cost-or-market represents a departure from the historical cost concept, but is considered a conservative accounting measure. We will refer to lower-of-cost- or-market by using the term LCM. Determining Market Value Net Realizable Value (Ceiling) Net Realizable Value less Normal Profit (Floor) Market value is NOT necessarily the amount for which inventory can be sold. Accounting Research Bulletin No. 43 defines “market value” in terms of current replacement cost. The first step in applying LCM is to determine market value. Market value is considered replacement cost, as long as replacement cost falls between the ceiling and the floor. The ceiling is a shorthand way of referring to the net realizable value of the inventory item. The floor is shorthand for net realizable value reduced by the normal profit. Determining Market Value Net Realizable Value (Ceiling) Net Realizable Value less Normal Profit (Floor) Net Realizable Value (NRV) is the estimated selling price less cost of completion and disposal. Replacement Cost The definition of market value varies internationally. In many countries, for example New Zealand market value is defined as NRV. Net realizable value is the estimated selling price per unit of the item, less the cost to complete and dispose of that item. The floor is merely the net realizable .
