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Chapter 6: 9RQ (page 357)

What does the lower-of-cost-or-market (LCM) rule require?

Short Answer

Expert verified

The historical cost and market cost (or net realizable cost) are the two parameters that are required under the LCM approach.

Step by step solution

01

IFRS standard regarding inventory reporting

As per IFRS guidelines, the inventory must be reported at the lower of cost or market value. This is based on the principle of conservatism which states that the reporting value must be realistic.

02

Requirement for LCM rule

The LCM approach takes two values in consideration for determining the cost o inventory –

a) Historical cost

b) Market value or net realizable cost

This approach is logical in the sense that if the replacement cost (market value) is less than the historical cost then the company would always show a profit during a lower market price. So it is necessary to adjust the inventory value based on the market price.

Thus LCM approach is suitable for valuing the inventory cost in any market condition.

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Most popular questions from this chapter

Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited’s putters:

Date Item Quantity Unit Cost

Nov. 1 Balance 24 \) 53

6 Sale 20

8 Purchase 30 70

17 Sale 30

30 Sale 2

Requirements

2. Journalize Golf Unlimiteds inventory transactions using the LIFO inventory costingmethod. (Assume purchases and sales are made on account.)

How is days’ sales in inventory calculated, and what does it measure?

How is inventory turnover calculated, and what does it measure?

Question:Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

1. Which inventory costing method produced the lowest cost of goods sold?

When does an inventory error cancel out, and why?
See all solutions

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