Accounting for Inventories - Lower of Cost or Market - Example

This video tutorial explains the concept of Lower of Cost or Market (LCM) in inventory management. It provides a detailed example using Foxtrot company to demonstrate how to calculate total invoice and market costs, determine the LCM, and make necessary adjustments. The tutorial covers both individual inventory and inventory as a whole, highlighting the differences in approach and the importance of accurate calculations for financial reporting.

What does LCM stand for in inventory management?

• Least Cost Management

• Last Cost Method

• Lower of Cost or Market

• Lowest Cost Method

Which of the following is NOT a method to calculate LCM?

• Individual Inventory

• Group Inventory

• Inventory as a Whole

• Inventory by Region

How is the total invoice cost for T-shirts calculated?

• Quantity multiplied by invoice cost

• Invoice cost divided by quantity

• Quantity multiplied by market cost

• Market cost divided by quantity

What does the LCM column represent in the table?

• The replacement cost of inventory

• The lower cost between invoice and market

• The average cost of inventory

• The highest cost between invoice and market

What does the total invoice cost indicate before LCM adjustments?

• The profit from selling inventory

• The cost to replace inventory

• The ending inventory value before adjustments

• The current market value of inventory

Why is it important to perform journal entries for LCM adjustments?

• To adjust the sales revenue

• To calculate the profit margin

• To increase the inventory value

• To reflect the loss in inventory value

What is the main difference when calculating LCM for inventory as a whole?

• Using the highest cost of all items

• Using the total market cost only

• Using the lowest total amount between invoice and market costs

• Using the average cost of all items

What should you do if the LCM write-down results in a negative number?

• Increase the inventory value

• Ignore the result

• Recalculate as something went wrong

• Proceed with the journal entry

If the LCM write-down is zero, what does it imply?

• The inventory needs to be sold

• The market cost is higher than the invoice cost

• The inventory value needs to be increased

• The inventory value is already at its lowest

What is the purpose of calculating LCM in inventory management?

• To ensure inventory is valued at the lower of cost or market

• To reduce production costs

• To maximize profit

• To increase sales