Lower of Cost or Market
An inventory valuation principle recording inventory at either original cost or current market value, whichever is lower, applying conservatism to prevent overstatement.
Lower of Cost or Market
An inventory valuation principle that records inventory at either its original cost or its current market value (replacement cost, subject to certain constraints), whichever is lower, applying the conservatism principle to prevent overstatement of assets and profits.
For instance, if a retailer purchased electronics inventory for $250,000 but due to technological advances, the current market value (replacement cost) has fallen to $200,000, the lower of cost or market rule would require writing down the inventory to $200,000, recognizing a $50,000 loss.
This approach ensures inventory isn’t reported at amounts exceeding its economic value, preventing overstated assets and delayed loss recognition. Under newer accounting standards (ASU 2015-11), public companies now apply “lower of cost or net realizable value” (LCNRV), where net realizable value represents estimated selling price minus costs of completion and disposal. The principle applies to individual items, inventory categories, or total inventory depending on company policy. While creating more conservative financial statements, the method also results in immediately recognized losses that cannot be recovered if market values subsequently increase.