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Simple English definitions for legal terms
lower-of-cost-or-market method
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A quick definition of lower-of-cost-or-market method:
The lower-of-cost-or-market method is a way to determine the value of inventory. It means that the inventory is priced at either the cost of acquiring it or the current market value, whichever is lower. This helps ensure that the inventory is not overvalued and reflects its true worth.
A more thorough explanation:
The lower-of-cost-or-market method is a way of pricing or costing inventory. This method sets the value of inventory at either the cost of acquiring it or the market cost, whichever is lower.
For example, let's say a company has 100 units of a product in inventory. They purchased these units for $10 each, so the total cost of the inventory is $1,000. However, the market value of the product has decreased and is now only $8 per unit. Using the lower-of-cost-or-market method, the company would value their inventory at $800 (100 units x $8 per unit) instead of the original cost of $1,000.
Another example would be if a company has 50 units of a product in inventory. They purchased these units for $20 each, so the total cost of the inventory is $1,000. However, due to a decrease in demand, the market value of the product has decreased and is now only $15 per unit. Using the lower-of-cost-or-market method, the company would value their inventory at $750 (50 units x $15 per unit) instead of the original cost of $1,000.
The lower-of-cost-or-market method is used to ensure that inventory is not overvalued on a company's balance sheet. It is a conservative approach that takes into account any decreases in market value that may occur after inventory has been purchased.