Lower of Cost or Market

If the value of our inventory has decreased, we must evaluate whether we need to take a loss in the current period related to this decrease in value. This is common in technological industries, where products become obsolete over time.

Concept: Lower of Cost or Market


Problem: Using the following data, determine the value of inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Assume expenses of $2 per unit are expected to be incurred in selling the inventory.


Lower of Cost or Market Additional Practice Problems

Consider the following:

Use Lower of Cost or Market and determine the amount of the write-down that the company will record.

a. $3,500

b. $2,500

c. $4,500

d. $2,000

Watch Solution

Inventory is listed on the balance sheet at:

a. Historical cost

b. Lower of Cost or Market

c. Net realizable value

d. Net book value

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On December 31, 2009, the end of the accounting period, Cruise Company has on hand 10,000 units of a resale item which cost $40 per unit when purchased on June 15, 2009. The selling price is $70 per unit. On December 30, 2009, the cost had dropped to $38 per unit. In view of the large quantity of units on hand, no purchases are anticipated in the next six to nine months. At what inventory amount should the 10,000 units be reported?

a. $400,000.

b. $700,000.

c. $320,000.

d. $380,000.

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The write-down of inventory to market:

a. Only affects the balance sheet and not the income statement.

b. Only affects the income statement and not the balance sheet.

c. Affects both the income statement and the balance sheet.

d. Affects neither the income statement nor the balance sheet.

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A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market rule. Additional information, shown below, is available for the most recent year as of December 31. Using the lower-of-cost-or-market rule, what is the reported inventory value at December 31 for one unit of product II and one unit of product IV?

a. Product II: $100; Product IV: $90

b. Product II: $100; Product IV: $70

c. Product II: $70; Product IV: $70

d. Product II: $70; Product IV: $90

Watch Solution