How Do You Record Inventory at the Lower of Cost or Market?
0:00 Introduction
0:16 Copyright Notice
0:37 Problem Setup: Gym, Tanning & Laundry's Inventory
0:57 Real-World Example: Why Inventory Value Can Decline (iPhone 5 Analogy)
2:22 The Problem: Why We Can't Overstate Inventory on the Balance Sheet
4:03 Introduction to the Lower of Cost or Market Rule
4:16 Applying LCM: Individual Item vs. Category vs. Aggregate Methods
5:00 Calculating the Current Book Value of Inventory
6:40 Why This Matters to Investors (Real-World Example: Home Depot)
7:29 Setting Up the Rule: Comparing Cost vs. Market Value per Unit
8:30 Identifying Which Items Need an Adjustment
10:29 Calculating the Per-Unit Adjustment Amount
11:39 Calculating the Total Dollar Adjustment per Item
12:44 Total Adjustment Needed Across All Items
13:26 Understanding Materiality in This Context
14:15 Note: Market Value Determination Differs in Intermediate Accounting
14:42 Journal Entry: Adjusting Inventory to Lower of Cost or Market
15:52 Alternative Approach: Using a Contra Asset Account
16:14 Determining the Final Reported Inventory Value
16:53 Closing Remarks
In this video, we explore how to apply the Lower of Cost or Market (LCM) rule to inventory using basic financial accounting concepts. We’ll walk through:
Calculating the LCM adjustment
Preparing the journal entry for the adjustment
Determining the correct balance sheet value for inventory