Understanding and Applying Lower of Cost or Market (LCM) Adjustments for Inventory

The video tutorial explains the concept of Lower of Cost or Market (LCM) in inventory management. It discusses how LCM is an adjustment made to inventory at the end of a period to ensure it is reported at the lower of cost or market value. The video details the definitions of cost and market, and when to record a loss if the recorded cost is higher than the replacement cost. It also outlines three methods for applying LCM: by individual items, major categories, or the entire inventory. The tutorial concludes with a preview of the next video on how to apply LCM practically.

What is the primary purpose of the Lower of Cost or Market (LCM) method?

• To ensure inventory is reported at the lower of its cost or market value

• To increase the value of inventory on the books

• To determine the selling price of inventory

• To calculate the profit margin of inventory

Under what condition should a company record a loss for its inventory?

• When the inventory is damaged

• When the recorded cost is higher than the replacement cost

• When the market value is higher than the recorded cost

• When the inventory is sold at a discount

Which method of applying LCM is considered the most accurate?

• Item-by-item

• For the entire inventory

• By major categories

• By department

What is a potential downside of applying LCM to the entire inventory?

• It is too time-consuming

• It is not compliant with accounting standards

• It requires specialized software

• It may not be as accurate

Why might a company choose to apply LCM by major categories instead of item-by-item?

• It is more accurate

• It provides more detailed financial reports

• It is less time-consuming

• It is required by law