Lower of Cost and Market Method

AAA

DEFINITION of 'Lower of Cost and Market Method'

A requirement of GAAP in the United States that inventory be recorded at the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory.

INVESTOPEDIA EXPLAINS 'Lower of Cost and Market Method'

The lower of cost and market method has two boundaries on the valuation of inventories. The first is the inventory ceiling, which requires that inventory must be reported no higher than the net realizable value less expenses. The second boundary is the inventory floor, which requires that inventory value be reported at no lower than the net realizable value plus normally attainable profit.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  3. Net Asset Value - NAV

    A mutual fund's price per share or exchange-traded fund's (ETF) ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or ...
  5. Net Realizable Value - NRV

    The value of an asset that can be realized by a company or entity ...
  6. Inventory Reserve

    An accounting entry that represents a deduction from earnings ...
RELATED FAQS
  1. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  2. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  3. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  4. Investing

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  5. Fundamental Analysis

    The Best 5 Online Accounting Systems For Small Business

    Running a small business can be difficult, but thanks to these online accounting services, taking care of payroll doesn't have to be.
  6. Investing

    Understanding Cost Accounting

    Cost accounting is the method of financially allocating expenses to goods that are manufactured for resale. Cost accounting is also referred to as managerial accounting, because managers use ...
  7. Investing

    What are Prepaid Expenses?

    A prepaid expense is an asset on the balance sheet. Due to accounting principles, expenses are often accrued on the balance sheet and expensed in a later period.
  8. Investing

    What's a Sunk Cost?

    A sunk cost was incurred in the past, is independent of future events and cannot be recouped. Economists teach that sunk costs should not be considered when making a financial decision. Rather, ...
  9. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  10. Fundamental Analysis

    What's the FCCR?

    The fixed charge coverage ratio (FCCR) is an accounting calculation that shows a company’s ability to pay its fixed costs – expenses that generally do not vary with production level. This may ...

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center