What is the LCM rule?
What is the LCM rule?
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. This situation typically arises when inventory has deteriorated, or has become obsolete, or market prices have declined.
Why NRV is lower than cost?
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. In essence, the Inventory account would be credited, and a Loss for Decline in NRV would be the offsetting debit.
How do you calculate NRV?
It is calculated by subtracting the cost of selling or disposing of the asset from its market value.
- NRV = Market Value of Asset – A Cost of Selling that Asset.
- NRV of Account Receivables = Market Value- Provision for Doubtful Debts.
- Let's say a firm is having an asset, which is having a market value of $100.
How do you use LCM?
Valuing Inventory at Lower of Cost or Market (LCM)
- Replacement cost > net realizable value, use net realizable value for replacement cost.
- Replacement cost < net realizable value minus a normal profit margin, use net realizable value minus a profit margin for replacement cost.
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