32 valuation at lower of cost or market lcm 32

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3.2 VALUATION AT LOWER OF COST OR MARKET (LCM)3.2 VALUATION AT LOWER OF COST OR MARKET (LCM)It was explained how costs are assigned to ending inventory and cost of goods sold usingIt was explained how costs are assigned to ending inventory and cost of goods sold usingone of four costing methods (FIFO, LIFO, Weighted average, or specific identification).one of four costing methods (FIFO, LIFO, Weighted average, or specific identification).Yet, the cost of inventory is not necessarily the amount always reported on a balanceYet, the cost of inventory is not necessarily the amount always reported on a balancesheet. Accounting principles require that inventory be reported at the market value ofsheet. Accounting principles require that inventory be reported at the market value ofreplacing inventory when market is lower than cost. Merchandise inventory is then saidreplacing inventory when market is lower than cost. Merchandise inventory is then saidto be reported on the balance sheet at the lower of cost or market (LCM).to be reported on the balance sheet at the lower of cost or market (LCM).In applying LCM, cost is the acquisition price of inventory computed using one of theIn applying LCM, cost is the acquisition price of inventory computed using one of thehistorical cost methods - specific identification, FIFO, LIFO, and Weighted average;historical cost methods - specific identification, FIFO, LIFO, and Weighted average;market is defined as the current market value (cost) of replacing inventory. It is themarket is defined as the current market value (cost) of replacing inventory. It is thecurrent cost of purchasing the same inventory items in the usual manner. It is important tocurrent cost of purchasing the same inventory items in the usual manner. It is important toknow that market is not defined as the sales prices. A decline in market cost reflects a lossknow that market is not defined as the sales prices. A decline in market cost reflects a lossof value in inventory. This is because the recorded cost of inventory is higher than theof value in inventory. This is because the recorded cost of inventory is higher than thecurrent market cost. When this occurs, a loss is recognized. This is done by recognizingcurrent market cost. When this occurs, a loss is recognized. This is done by recognizingthe decline in merchandise inventory from recorded cost to market cost at the end of thethe decline in merchandise inventory from recorded cost to market cost at the end of theperiod.period.LCM is applied in one of three ways:LCM is applied in one of three ways:(1)(1)Separately to individual itemSeparately to individual item(2)(2)To major categories of itemsTo major categories of items(3)(3)To the whole of inventoryTo the whole of inventoryThe less similar the items are that make up inventory, the more likely it is that companiesThe less similar the items are that make up inventory, the more likely it is that companiesapply LCM to individual items. Advances in technology further encourage the individualapply LCM to individual items. Advances in technology further encourage the individualitem application.

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