Lower of Cost or Market

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If you have difficulty answering the following questions, learn more about this topic by reading our Lower of Cost or Market Explanation.

1.	The accounting guideline usually associated with the lower of cost or market (LCM) rule for valuing inventory.
Conservatism              Economic Entity              Reliability

2.	The upper limit or ceiling for the replacement cost in the LCM rule.
Net realizable value        Net realizable value minus normal profit        Expected selling price in the ordinary course of business

3.	The lower limit or floor for the replacement cost in the LCM rule.
Net realizable value        Net realizable value minus normal profit        Expected selling price in the ordinary course of business

4.	Define net realizable value: _________________________________________.

5.	At December 31, 2006 a retailer's Inventory account correctly reported its cost of $48,000. On December 31, 2006 the market value of the inventory was $49,000. The retailer also uses a balance sheet valuation account Allowance to Reduce Inventory to LCM. On December 31, 2006 the balance in the valuation account should be
$0              credit balance of $1,000              debit balance of $1,000

6.	Continuing with the information in Question 5... On December 31, 2006 the retailer's cost of its inventory is correctly reported in its Inventory account as $51,000. The market value of the inventory on December 31, 2006 was $50,300. What amount should be reported as the balance in Allowance to Reduce Inventory to LCM at December 31, 2006?
$0              credit balance of $700              debit balance of $700

  Use the following information on Product J for answering Questions 7 - 11:
  Cost...................................................$9.00
  Expected selling price........................$12.50
  Cost of completion and disposal...........$1.40
  Replacement cost...............................$9.50
  Normal profit...................20% of selling price

7.	The net realizable value of Product J is: $__________.
8.	The ceiling or upper limit on the replacement cost is: $__________.
9.	The floor or lower limit on the replacement cost is: $__________.
10.	The market amount that will be compared to cost is: $__________.
11.	The lower of cost or market that should be reported on the balance sheet for Product J under the item-by-item method is: $__________.

  Use the following information on Product W for answering Questions 12 - 16:
  Cost...................................................$9.00
  Expected selling price........................$12.00
  Cost of completion and disposal...........$1.40
  Replacement cost...............................$8.00
  Normal profit...................20% of selling price

12.	The net realizable value of Product W is: $__________.
13.	The ceiling or upper limit on the replacement cost is: $__________.
14.	The floor or lower limit on the replacement cost is: $__________.
15.	The market amount that will be compared to cost is: $__________.
16.	The lower of cost or market that should be reported on the balance sheet for Product W under the item-by-item method is: $__________.

  Use the following information on Product Z for answering Questions 17 - 21:
  Cost...................................................$9.00
  Expected selling price........................$10.00
  Cost of completion and disposal...........$1.40
  Replacement cost...............................$8.75
  Normal profit...................20% of selling price

17.	The net realizable value of Product Z is: $__________.
18.	The ceiling or upper limit on the replacement cost is: $__________.
19.	The floor or lower limit on the replacement cost is: $__________.
20.	The market amount that will be compared to cost is: $__________.
21.	The lower of cost or market that should be reported on the balance sheet for Product Z under the item-by-item method is: $__________.

  Use the following information on Product D for answering Questions 22 - 26:
  Cost...................................................$9.00
  Expected selling price........................$11.00
  Cost of completion and disposal...........$1.40
  Replacement cost...............................$8.00
  Normal profit...................20% of selling price

22.	The net realizable value of Product D is: $__________.
23.	The ceiling or upper limit on the replacement cost is: $__________.
24.	The floor or lower limit on the replacement cost is: $__________.
25.	The market amount that will be compared to cost is: $__________.
26.	The lower of cost or market that should be reported on the balance sheet for Product D under the item-by-item method is: $__________.

  Use the following information on Product R for answering Questions 27 - 31:
  Cost...................................................$8.00
  Expected selling price........................$12.00
  Cost of completion and disposal...........$1.40
  Replacement cost...............................$8.10
  Normal profit...................20% of selling price

27.	The net realizable value of Product R is: $__________.
28.	The ceiling or upper limit on the replacement cost is: $__________.
29.	The floor or lower limit on the replacement cost is: $__________.
30.	The market amount that will be compared to cost is: $__________.
31.	The lower of cost or market that should be reported on the balance sheet for Product R under the item-by-item method is: $__________.

32.	The most conservative application of the lower of cost or market (LCM) rule is
Inventory totals              Item-by-item              Major categories of inventory

33.	The least conservative application of the lower of cost or market (LCM) rule is
Inventory totals              Item-by-item              Major categories of inventory