Final answer:
The word 'market' in 'the lower of cost or market' stands for the net realizable value of inventory, which reflects the estimated selling price minus certain costs. This valuation ensures inventory is not overstated on the balance sheet.
Step-by-step explanation:
The term "market" in the context of "the lower of cost or market" generally refers to the (D) net realizable value of an inventory item. This value is essentially the estimated selling price of the inventory in the ordinary course of business less any reasonable predictable costs of completion, disposal, and transportation. Hence, the correct answer is D. net realizable value.
The market price affected by demand and supply can fluctuate and sometimes fall below the cost of production, leading to adjustments in inventory valuation. When this happens, the market price, or the net realizable value, must be compared with the original cost, and the lower amount is used to record the inventory on the balance sheet. This process ensures that the inventory is not recorded at an amount that's more than what the company expects to realize from selling it.