Final answer:
The term 'market' in 'lower of cost or market' refers to the current replacement cost or value of a product in a particular context, usually influenced by demand and supply. It dictates that inventory should be reported at the lower of the cost to produce or the market value.
Step-by-step explanation:
The term 'market' in the phrase 'lower of cost or market' generally means the value of a product in a particular context. This concept is a part of inventory accounting, and it refers to the practice of valuing inventory at the lower of the cost to produce or purchase the goods, or the market value, which is the price at which these goods could be sold in the open market. In this context, 'market' means the current or replacement cost of inventory on hand, and it is often influenced by factors such as demand and supply dynamics in the marketplace.
For example, if the demand for a product decreases or supply increases, leading to excess goods available, the market price may drop below the cost of production. Retailers during a going-out-of-business sale or international companies with excess supply might find themselves selling products at a lower market price than their production costs. These situations exemplify how market forces can cause the market value of products to be lower than their cost.