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ACC 333 (82)

Gross profit.doc

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ACC 333
Douglas King

Lower of Cost or Market LCM RuleCost orMarket ValueMarket value means the replacement cost of the inventory Replacement cost may be in the form of purchase cost or manufacturing cost In other words market value is amount that we would have to pay to acquire inventory of same quantity and quality through purchase or through manufacture However upper and lower limits have been placed on the market value of inventoryUpper limit also called ceiling is the net realizable value NRV of inventory NRV equals expected selling price less the sum of expected cost of completion and expected cost needed to make the saleLower limit also called floor is net realizable value less normal profit margin on the inventoryThe LCM rule can be applied to inventory on individual items basis inventory class basis or to entire inventory However the choice must be consistentExampleCompany A owns an item of inventory having original cost of 900 Its replacement cost is 880 The company expects to sell it at 980 However an expense of 40 must be incu
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