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Inventory
1
Inventory
Valuation
Decision
Making
using
inventory
Ratios
VALUATION OF ENDING INVENTORY
Lower of Cost or Market
2
Historical cost
Current replacement cost (market value)
Inventory is
adjusted to be the
lesser of:
Record a loss and reduce inventory
If market value is
less than cost:
No entry needed
If cost is less than
market:
Application of conservatism principle
3
Lower-of-Cost-or-Market Rule. Under Armour, Inc., paid
$3,000,000 for inventory. By its year-end, the inventory can
be replaced for $2,000,000. Under Armour’s year-end
balance sheet must report this inventory at the LCM value of
$2,000,000.
VALUATION OF ENDING INVENTORY
Lower of Cost or Market - Example