The lower of cost or market (LCM) method states that when valuing a company's inventory, it is recorded on the balance sheet at either the historical cost or the market value. Historical cost refers to the cost at which the inventory was purchased.
The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price.
The value of a good can shift over time. LCM holds significance, because if the price at which the inventory can be sold falls below the net realizable value of the item, thus triggering a loss for the company, then the lower of cost or market method can be employed to record the loss.
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