Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025
Definition
Lower-of-cost-or-market (LCM) is a conservative inventory valuation method that records inventory at the lower of its original cost or current market value. This approach ensures that losses from declines in inventory value are recognized promptly.
5 Must Know Facts For Your Next Test
LCM applies to individual items, categories, or the entire inventory, depending on the business's policy.
Market value in LCM is defined as the current replacement cost, constrained by net realizable value and net realizable value minus a normal profit margin.
The LCM rule prevents overstatement of inventory and earnings on financial statements.
When applying LCM, if the market value falls below the historical cost, an adjustment entry is required to write down the inventory.
The LCM method aligns with Generally Accepted Accounting Principles (GAAP) to ensure accurate and fair financial reporting.
The original purchase price of an asset or inventory item.
Net Realizable Value (NRV): The estimated selling price of an asset in the ordinary course of business minus any costs of completion, disposal, and transportation.
Inventory Write-Down: An accounting process where the book value of unsellable or obsolete inventory is reduced to reflect its current market value.