Question

Your company has not yet decided how it will apply LCM to its inventory. If management wants to minimize the value of ending inventory, it should:

O apply LCM by item.
O apply LCM by group, or "by class."
O apply LCM to total inventory.
O apply LCM using any one of the above methods because LCM does not affect the value of inventory.

Answer 1

To minimize the value of ending inventory, a company should apply the Lower of Cost or Market (LCM) rule by item, as this method can lead to a lower inventory valuation by assessing each item's market value individually.

Step-by-step explanation:

The question relates to inventory valuation and the Lower of Cost or Market (LCM) rule in accounting. When management wants to minimize the value of ending inventory, applying LCM by item should be considered. This method involves evaluating each item in the inventory separately, and if market value is lower than cost, the inventory is written down to this lower market value. As a result, it can lead to a lower value of ending inventory compared to applying LCM on a group or total inventory basis, as the aggregation could mask higher declines in value for some items.