Question

Identify the ways in which lower of cost or market can be applied to merchandise inventory?

1) By comparing the cost of inventory with its market value
2) By using the lower of cost or market rule
3) By adjusting the inventory value to the lower of cost or market
4) By valuing the inventory at the lower of cost or market

Answer 1

The lower of cost or market (LCM) rule can be applied to merchandise inventory by comparing the cost of inventory with its market value, using the LCM rule, adjusting the inventory value to the lower of cost or market, and valuing the inventory at the lower of cost or market.

Step-by-step explanation:

The lower of cost or market (LCM) rule is an accounting principle used to value merchandise inventory. In applying LCM to merchandise inventory, there are several ways it can be implemented:

1. Comparing the cost of inventory with its market value: This involves determining the cost of the inventory and then comparing it to its market value. The lower of the two values is used to establish the inventory value.
2. Using the lower of cost or market rule: This rule states that when the market value of inventory drops below its original cost, the inventory should be written down to the lower market value.
3. Adjusting the inventory value to the lower of cost or market: This involves making adjustments to the inventory value, reducing it to the lower of cost or market value.
4. Valuing the inventory at the lower of cost or market: This approach involves directly valuing the inventory at the lower of its cost or market value.

These methods ensure that the inventory is valued at a realistic and conservative amount, reflecting any potential declines in its market value.