When the lower of cost or market (LCM) rule requires an inventory adjustment: O c. the inventory adjustment is recorded in a contra-account called merchandise allowances. the adjustment usually, but not always, reduces the book value of inventory O d. the write-down does not affect any of the financial statements.Click to see full answer. Likewise, what is lower of cost or market rule for inventory?Lower of cost or market (LCM) 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. Net realizable value is defined as the estimated selling price, minus estimated costs of completion and disposal.One may also ask, what is the purpose of the lower of cost or net realizable value rule? Lower Of Cost Or Net Realizable Value. This simply means that if inventory is carried on the accounting records at greater than its net realizable value (NRV), a write-down from the recorded cost to the lower NRV would be made. Also know, what is the meaning of market as it is used in determining the lower of cost or market for inventory? 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 value of a good can shift over time.How is inventory write down calculated?This is done by crediting the inventory account and debiting the cost of goods sold. If the reduction is larger, then the accountant reduces the value of inventory by crediting the inventory account and debiting an account such as “write-down damaged goods.”
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