lower of cost or market


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Lower of Cost or Market

At the end of an accounting period, a convention used to mark the current value of remaining inventory. Under this convention, the inventory is recorded as either the historical cost (what the company originally paid) or the fair market value (what the inventory is now worth), whichever is lower. A company does this in order to minimize its tax liability.

lower of cost or market

A method for determining an asset's value such that either the original cost or the current replacement cost, whichever is lowest, is used for financial reporting purposes. For example, an inventory item originally purchased for $50 that has a current market value of $30 would appear on the firm's balance sheet at $30. The use of lower of cost or market is considered a conservative method of valuing assets.
References in periodicals archive ?
Applying the lower of cost or market and arm's-length price principles Even assuming the taxpayer has properly written down its inventory in compliance with the regulations and Thor Power, the Sec.
Therefore, taxpayers should be aware of the two separate accounting entries that must be made regarding the inventory: (1) The amount of inventory write-down, if any, determined under the lower of cost or market principles; and (2) the proper value of the inventory in the sale to the related party, determined under the arm's-length price principles, which generally include a profit factor.
Further, an inventory write-down is determined by the lower of cost or market principles, which do not necessarily provide the same result as the arm's-length price principles.