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Describe the lower of cost or market rule (LCM) and how it differs from the lower...

Describe the lower of cost or market rule (LCM) and how it differs from the lower of cost or net realizable value rule.
a) Description of the LCM rule
b) Use of floors and ceilings
Business   Accounting   
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Answer #1

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. Historical cost refers to the cost at which the inventory was purchased. The value of a good can shift over time.

The lower of cost or net realizable value method states that the inventory should be reported at the lower of its cost or its net realizable value (NRV). The rule is associated with the conservatism guideline or principle.

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