Explain the lower of cost or market (LCM) rule
What will be an ideal response?
The conservatism convention supports the application of the LCM rule. Essentially, the rule requires that inventory should be reported at the lower of its historical cost or market value. Market value is defined as the replacement cost.
If inventory can be replaced for less than the cost at which it was purchased, then a loss in value has occurred during the current period and the financial reports should reflect that loss in value. It would be misleading to continue to report inventory at a value greater than replacement cost as of the balance sheet date.
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