ABSTRACT
This chapter examines the principles of inventory valuation, lower-of-cost-or-market-value (LCM) method, inventory valuation methods and an overview of accounting for inventories. Having identified the cost of closing inventory at the end of the period, based on one of the inventory valuation methods, the accountant has to undertake two further principal investigations which are concerned with the “saleability” of the items contained in the closing inventory figure. Under the LCM method, a market-price test is run where the current market price is compared with the historical cost derived under one of the three inventory valuation methods. Under the LCM method, the lower of the two is conservatively selected as the basis for the valuation of inventory. The LCM is an example of conservatism. Conservatism means selecting methods of measurement that yield lower net income, lower assets, and the lower shareholders’ equity.
