Lower of cost or market value: -

Lower of cost or market value is the method of recording ending inventory in financial statement, Balance sheet. This method states that a business must record the endinginventory at whichever cost is lower, either original cost of inventory or its current market price.Under the historical cost accounting all assets in the financial statements are to be recorded at cost, however lower of cost or market basic is exception to the rule.

Normally, ending inventory is stated at historical cost. However there are times when historical cost is more than its net relizable value, that means inventory has lost its value. (Net realizable value is estimated selling price after deducting cost related to sale.) If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. Any loss resulting from the decline in the value of inventory is charged to cost of goods soldor loss on the reduction on Inventory to LCM, based on the materiality of that amount

____________________________________________________________________________________________________________________________________________________

TYPE QUANTITY UNIT COST MARKET PRICE PER UNIT LOWER OF BOTH VALUE OF INVENTORY

_____________________________________________________________________________________________________________________________________________________

A 500 $10 $12 $10 $5,000

B 700 $15 $13 $13 $9,100

C 320 $18 $18 $18 $5,760

D 470 $10 $8 $8 $3,760

______________________________________________________________________________________________________________________________________

TOTAL $23,620

______________________________________________________________________________________________________________________________________

From the above date we can observe that,

Type A has unit cost of $ 10 and market price of $ 12.Comparing both, we got $ 10 as lower than $ 12, so we pick $ 10 for calculating ending inventory, So type A will be valued as $10*500= $ 5,000.

Let us take example of Type B, Unit cost is $15 and market price is $ 13.Comparing both, $ 13 is lower, so we pick $13, and so value of type B inventory is $ 13*700 = $9,100.

Same logic applies to each type of inventory.

Inventory Estimate

ABC Limited sells four products P,Q,R and S. At the end of accounting period following items are on hand

__________COST PRICE_______________________SELLING PRICE______________________________

$ $

P 4,759 5,200

Q 2,300 2,300

R 3,270 3,300

S 7,000 7,100

_________________________________________________________________________________________________

1% sales commission is paid to the company's agents on all sales. What value for inventory should be shown in the company's financial statementsat the end of accounting period?