Example of lower-of-cost-or-market method, Accounting Basics

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Q. Example of lower-of-cost-or-market method?

A company may perhaps apply LCM to each inventory item such as Monopoly each inventory class (such as games) or total inventory. To see how the company would oblige the method to individual items and total inventory look at Exhibit 62. If LCM is obliged on an item-by-item basis ending inventory would be USD 5000. The company would subtract the USD 5000 ending inventory from cost of goods available for sale on the income statement and report this inventory in the current assets section of the balance sheet. In the class method a company applies LCM to the total cost and total market for each class of items compared. One class might be games and another might be toys. Subsequently the company values each class at the lower of its cost or market amount. If LCM is obliged on a total inventory basis ending inventory would be USD 5100 since total cost of USD 5100 is lower than total market of USD 5150. An annual report of Du Pont comprises an actual example of applying LCM. The report states that substantially all inventories are valued at cost as determined by the last-in first-out (LIFO) method in the aggregate such valuations aren't in excess of market. The term in the aggregate signifies that Du Pont applied LCM to total inventory.


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