Lower of cost or market là gì năm 2024
The lower of cost or market (LCM) approach specifies that when evaluating a company’s inventory, it should be reflected on the balance sheet either at its historical cost or the market value. Show
The historical cost is the price at which the company's inventory was acquired. According to the LCM rule, a business shall record the cost of inventory at whichever cost is less: the initial cost or its market price. The idea of the lower cost or market was initially included in typical accounting methods in England throughout the nineteenth century. The lower of cost or market was regarded as fair since assets were valued on a going-concern basis rather than the cost at which they were acquired. The academic accountants struggled to accept the idea since it lacked clarity. However, despite the criticism, the lowest cost or market swiftly gained traction in practice and, by the early 20th century, was acknowledged as the most generally utilized approach for inventory valuation, according to the special committee report on cooperation with stock exchanges. LCM survived despite lacking accounting logic because of its conservative approach to valuation and because it addressed the opposing principles of cost value. Due to its conservative nature, users may value the inventory at the price when it is conservative, and users may value the inventory at the price it might be sold. Understanding InventoryBoth the raw materials required to make products and the products on hand for purchase are included in the inventory. On a company's balance sheet, it is categorized as a current asset. The three types of inventory include
Inventory Turnover is one of the essential assets a business can have because it is one of the significant ways to generate money and profits for the company stockholders. Inventory is a necessary valuable asset for every firm. It is the collection of finished or raw materials that a business maintains on board for everyday business activities. The inventory is categorized into :
Inventory is listed as a current asset in a company’s financial statement (balance sheet) and acts as a link between product delivery and manufacturing, as we discussed earlier. The carrying cost of material in inventory is transferred to the Cost of Goods Sold (COGS) segment of the profit and loss statement or Income statement. Why Is the Lower Cost or Market Method Used?Companies can declare losses using this technique by depreciating the value of the impacted inventory items. Most of the time, when a business retains the stock for a longer period, the LCM rule applies. However, remember that the above circumstances typically develop over time. When applying LCM, there is a clear criterion that you must observe. There is neither a gain nor a loss recorded when the cost and the market value are identical. This value could be adjusted to the market value, calculated by weighing the cost of replacing the inventory, the difference between the item's net realizable value and its normal profit, and the item's net realizable value. On the balance sheet, the amount by which the inventory item was written down is recorded under the cost of goods sold. The GAAP regulations utilized in domestic and international trade include the LCM approach. As a result, almost all assets are valued at their purchase cost when they first enter the accounting system. Following reporting periods, GAAP specifies numerous possible techniques for adjusting asset values. What Do Generally Accepted Accounting Principles (GAAP) Mean?A unified set of accounting guidelines, methods, and standards known as generally accepted accounting principles (GAAP) were released by the Financial Accounting Standards Board (FASB). 10 GAAP Principles:
When their accountants put together a public company's financial statements, they must adhere to GAAP in the United States. Points to be noted:
Utilizing the Rule of Lower of Cost or MarketThe rule often applies to firms whose products commenced to date. The rule is also applicable to products that lose value as an outcome of a declining market price, which is defined as the existing cost of replacing outdated stock if the market price is equal to or less than the net realizable value, which is essentially the expected selling price minus removal costs. Other Aspects in Applying the Rule of the Lower of Cost or Market
Inventory Valuation at the Lower of Cost or Market (LCM)The inventory that the company purchased at cost is contrasted with that inventory's market value in the lower cost or market inventory valuation approach. The market value of inventory is its replacement cost or how much it would cost to buy a similar amount of inventory on the open market. To comprehend replacement value, there are a few restrictions to keep in mind:
Net Realizable Value (NRV)The sale price of the inventory, less any expenses required to get it ready for sale, is the inventory's net realizable value. The average difference between the cost and sale price of the inventory represents a typical profit margin. Such replacement cost limitations set a replacement cost floor and cap. Under GAAP and International Financing Reporting Standards (IFRS), the net realizable value is a crucial metric in inventory accounting. Because it prevents the overvaluation of assets, NRV computation is crucial. The steps of valuing inventory at a lower cost or market are as follows:
XYZ company sells wallets. Cost information regarding the inventory of XYZ company is presented below: Replacement cost, in this instance, is situated between net realizable value and net realizable value less a typical profit margin. Therefore, $150 is taken as the replacement cost. Therefore, compared to the $250 purchase price, a $100 write-down is required. XYZ company sells wallets. Cost information regarding the inventory of XYZ company is presented below: The replacement cost, in this instance, is more than the net realizable value. Therefore, $160 was used as the replacement cost. Therefore, compared to the $250 purchase price, a $90 write-down is required. XYZ company sells wallets. Cost information regarding the inventory of XYZ company is presented below: Replacement cost, in this instance, is less than net realizable value, less a normal profit margin. Therefore, $140 was used as the replacement cost. Compared to the $250 purchase price, a $110 write-down is required. Accounting for the Lower Cost or Margin (LCM)Companies that follow U.S. GAAP must value their inventory using the lower-of-cost or market (LCM) technique. Market value is the cost to replace inventory, whereas cost is the price paid for it at the time of purchase. If the size of a write-down brought on by the lower of cost or market analysis is irrelevant, charge the expense to the cost of products sold; this is typically the case. If the loss is significant, you may want to keep track of it in another account, such as "Loss on LCM adjustment," to report on this information separately (especially if such losses occur frequently). The journal entry would be as follows if the data from the prescriptive were used: LCM: Advantages, Limitations, and a few noteworthy pointsThe main concern with the lower of cost or market rule is that it is inconsistent in that losses from retaining inventory are recorded while gains are not. As a result, it generally understates assets, and if the estimated reductions do not occur, it might boost future income. Additionally, calculating market value—even lower—does not reveal how much cash is locked up in inventory. Therefore, you cannot determine how much your goods could sell in the present market by using cash value because it is lower. AdvantagesThe following are a few benefits of lower of costs or market:
LimitationsSome of the limitations of LCM are as follows:
Noteworthy Points
ConclusionAccording to the lower-of-cost-or-market (LCM) approach of inventory costing, inventory is valued at the lesser of its original cost and its current market (replacement) cost. The term "cost" refers to the historical cost of inventory as calculated using the weighted-average inventory technique, particular identification, FIFO, or LIFO. The market typically refers to the replacement cost of a product in the typical purchasing amount. The fundamental premise of the LCM approach is that if an item's purchase price drops, so will its selling price. Accounting has traditionally embraced the LCM approach. Inventory valuation is done using the lower-of-cost or market (LCM) technique. It aids in conveying an accurate and fair perspective of an organization's financial accounts to all stakeholders. This accounting standard policy should be strictly followed to prevent any inconsistency in the financial statement audit process and reporting. The Lower of Cost or Market là gì?Theo phương pháp này, giữa giá vốn và giá thị trường của hàng tồn kho, kế toán sẽ định giá hàng tồn kho theo mức giá nào thấp hơn giữa hai mức giá này. Tiếng Anh gọi là Lower of Cost or Market (LCM). Giá thị trường chính là mức giá thông thường phải trả cho nhà cung cấp để có được hàng hóa đó. Lower of Cost and net Realizable value là gì?NRV là giới hạn giá khi sử dụng Quy tắc thị trường hoặc chi phí thấp hơn. Theo IFRS, các công ty cần ghi lại chi phí của hàng tồn kho cuối kì với chi phí thấp hơn và NRV, để đảm bảo rằng hàng tồn kho và báo cáo thu nhập của họ không bị cường điệu (theo ASPE, các công ty ghi nhận chi phí thấp hơn và giá trị thị trường). Giá gốc của hàng tồn kho là gì?2. Giá gốc hàng tồn kho. Giá gốc hàng tồn kho bao gồm: Chi phí mua, chi phí chế biến và các chi phí liên quan trực tiếp khác phát sinh để có được hàng tồn kho ở địa điểm và trạng thái hiện tại. Trích lập dự phòng giảm giá hàng tồn kho khi nào?Thời điểm lập dự phòng giảm giá hàng tồn kho là cuối kì kế toán năm; trường hợp doanh nghiệp áp dụng năm tài chính theo năm dương lịch thì thời điểm trích lập dự phòng giảm giá hàng tồn kho là thời điểm năm tài chính dương lịch đó. |