Final Answer:
The value of the inventory at the lower of cost or market is determined by comparing the cost of each item in the inventory with its current market value. The lower value between the cost and market value of each item is taken as the inventory value for that particular item.
Step-by-step explanation:
The lower of cost or market (LCM) method is an accounting principle used to value inventory items. It involves comparing the cost at which an inventory item was acquired with its current market value. The cost refers to the original price at which the item was purchased, while the market value represents the current worth of the item in the market. The LCM rule requires companies to value their inventory at the lower of these two values.
For each item in the inventory, the cost and market value are assessed. If the cost of an item is higher than its current market value, the market value is used to value that specific item in the inventory. Conversely, if the cost of an item is lower than its market value, the cost is used. This principle aims to ensure that inventory is not overstated on financial statements by valuing it at an amount that reflects its current market worth or the cost, whichever is lower.
The LCM method is essential for accurately reporting the value of inventory in financial statements, adhering to accounting standards, and providing stakeholders with a realistic view of the inventory's value in the current market conditions. It prevents the overstatement of inventory assets and ensures the financial statements reflect a more conservative and realistic valuation of inventory.