# Aziz

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Entertainment

Published on March 10, 2014

Author: azizmisbah93

Source: authorstream.com

Roll No:13(R) Misbah Aziz: Roll No:13(R) Misbah Aziz Lower of Cost or Market (LCM) Rule : Lower of Cost or Market (LCM) Rule Lower of Cost or Market (LCM) is the approach of valuing and reporting inventory at historical costs or current value, whichever is lower. It is a conservative accounting approach in tune with GAAP rules to record inventory at the lowest of production costs, repurchase costs, or market value. Market value means the replacement cost of the Inventory. In other words, market value is amount that we would have to pay to acquire inventory of the same quantity and quality through purchase or through manufacture. However, upper and lower limits have been placed on the market value of inventory. PowerPoint Presentation: Upper limit  (also called ceiling) is the net realizable value (NRV) of inventory. NRV equals expected selling price less the sum of expected cost of completion and expected cost needed to make the sale. Lower limit  (also called floor) is net realizable value less normal profit margin on the inventory How to determine the market amount used in the lower of cost or market rule: If the current replacement cost is  between  the floor and the ceiling, the  current replacement cost  is the market amount. If the current replacement cost is  greater  than the ceiling, the  ceiling amount  is the market amount. If the current replacement cost is lower than the floor, the  floor amount  is the market amount. Explanation: The LCM rule can be applied to inventory on individual items basis, inventory class basis or to entire inventory. However the choice must be consistent. : Explanation: The LCM rule can be applied to inventory on individual items basis, inventory class basis or to entire inventory. However the choice must be consistent. Cost Market Each Item Each Group Entire Inventory Group-1 Rs Rs Rs Rs Rs Cotton cloth 150,000 125,000 125,000 Polyester cloth 200,000 224,000 200,000 Group total 350,000 349,000 349,000 Group-2 Thicken 16,000 17,000 16,000 Thread 15,000 14,700 14,700 Group Total 31,000 31,700 31,000 Grand Total 381,000 380,700 380,700 LCM Rule applied to 35,5700 380,000 380,700 Value of closing inventory PowerPoint Presentation: LCM is a conservative approach of taking the lowest figure when faced with two or more uncertain alternatives. “Cost” refers to the cost required to manufacture or acquire the inventory, and ”market” refers to the prevailing prices in the market from where the merchant purchased the inventory, or the market where the merchant sells the merchandise or inventory stock. Adjusting of LCM: Cost of good sold DR Allowances to reduce Inventory to market CR Allowances to reduce inventory to market is contra asset account which is deducted from inventory in balance sheet. 13(R) : 13(R)

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