Final answer:
In lower-of-cost-or-market inventory valuation, 'market' means the current replacement cost, unless this amount exceeds the net realizable value or is less than the net realizable value minus a normal profit margin.
Step-by-step explanation:
When valuing raw materials inventory using the lower-of-cost-or-market rule, the term 'market' generally refers to the current replacement cost of the inventory items, provided that it is not more than the net realizable value (ceiling), or less than the net realizable value minus a normal profit margin (floor). This approach helps to avoid overstating the value of inventory when market conditions decline.
Current replacement cost represents the cost that a company would have to pay to replace an inventory item at the present time. This is considered the market value in the context of inventory accounting. When the market value is lower than the cost, inventory is written down to reflect the loss in value. This accounting practice is in line with the conservatism principle which ensures that the assets are not overstated and liabilities are not understated.