Page 303 - Accounting Principles (A Business Perspective)

7. Measuring and reporting inventories

The company must recognize the loss in the period the loss occurred. On the other hand, if ending inventory has a
market value of USD 45,000 and a cost of USD 40,000, the company would not recognize this increase in value. To
do so would recognize revenue before the time of sale.

LCM applied A company may apply LCM to each inventory item (such as Monopoly), each inventory class
(such as games), or total inventory. To see how the company would apply the method to individual items and total
inventory, look at Exhibit 62.
If LCM is applied on an item-by-item basis, ending inventory would be USD 5,000. The company would deduct
the USD 5,000 ending inventory from cost of goods available for sale on the income statement and report this
inventory in the current assets section of the balance sheet. Under the class method, a company applies LCM to the
total cost and total market for each class of items compared. One class might be games; another might be toys.

Then, the company values each class at the lower of its cost or market amount. If LCM is applied on a total
inventory basis, ending inventory would be USD 5,100, since total cost of USD 5,100 is lower than total market of
USD 5,150.
An annual report of Du Pont contains an actual example of applying LCM. The report states that "substantially
all inventories are valued at cost as determined by the last-in, first-out (LIFO) method; in the aggregate, such
valuations are not in excess of market". The term in the aggregate means that Du Pont applied LCM to total
inventory.

An accounting perspective:

Business insight

Procter & Gamble markets a broad range of laundry, cleaning, paper, beauty care, health care,

food, and beverage products around the world. Procter & Gamble's footnote in its Notes to
Consolidated Financial Statements in its annual report illustrates that companies often disclose
LCM in their notes to financial statements.
Inventories are valued at cost, which is not in excess of current market price. Cost is primarily
determined by either the average cost or the first-in, first-out method. The replacement cost of
last-in, first-out inventories exceeds carrying value by approximately USD 169 [million].

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