Lower of Cost or Market


The financial accounting term lower of cost or market refers to an inventory valuation rule that states items should be valued at their original cost or their current market cost, whichever is lower.


Also known as the LCM technique, the lower of cost or market approach to valuing inventory was developed in reaction to FASB No. 33, which states that companies have to disclose the affects of inflation on their inventory values.

The lower of cost or market initially helped ease creditor worries about the accuracy of a company's balance sheet, since using this approach results in a conservative estimate of the company's assets.  As focus shifted to the income statement, LCM was criticized for its potentially fictitious impact on the income statement.  An inventory could be written down in one accounting period (lowering profits) then sold at a normal profit in the next (inflating profits).

This concern resulted in a modification to this rule that now states the lower of cost or market approach does not apply if the items in inventory can be sold at a normal profit.  Furthermore, the value of inventory cannot be greater than the item's anticipated selling price minus sales expense.

Related Terms

balance sheet, inventory, sales expense, first in, first out, last in, last out, gross profit method, average cost method, retail method, prudent cost concept, excess of cost over fair market value, revenue from investments in stock