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nineteenth century, lower of cost or market was not common practice for valuation of factory inventory in the United States. The concept was not easy for the
Academic Accountants to accept due to its lack of logic. Despite the criticism, lower of cost or market quickly caught on in practice and by the early twentieth century was described as the most commonly accepted method for inventory valuation according to the Report of the Special Committee on Co-operation with Stock Exchanges. Although it lacked accounting logic, lower of cost or market survived because of its conservative approach to valuation and because it addressed opposing principles of cost and value. Its conservatism allowed users to value the inventory at the price for which the inventory could be sold.
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determine these three values and find the median of the values. The companies then compare the median value, which is called the designated market value, to the inventory cost that is recorded. The lower of these two values is subsequently reported on the balance sheet. Because the lower of cost or market approach requires companies to use three possible market values, the companies' financial statements can be difficult to compare.
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This FASB update makes usage consistent with the IFRS wording and removes the use of "or" in a context where "and" was always the correct one. However, the update does not apply to all companies. Companies that use the FIFO (first-in, first-out) and average-cost methods of inventory valuation are
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Three possible values can represent the market value: the replacement cost of the inventory, the net realizable value (also known as the "ceiling"), and the "floor" (the difference between the net realizable value and the normal profit). In the lower of cost or market approach, companies must
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The lower of cost or market concept first became part of normal accounting practices in
England during the nineteenth century. Lower of cost or market was considered fair because assets were valued on a going-concern basis, rather than the price at which the assets were purchased. During the
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An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
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The term "lower of cost or market" is now obsolete and is officially replaced by "lower of cost and net realizable value". According to the FASB Accounting
Standards Update,
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Penner, James; Kreuze, Jerry; Langsam, Sheldon (2016). "Analysis of
Simplification of Accounting Initiative for Inventory and Update of Other Simplification Proposals".
59:, and thus the inventory has lost value. If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the
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required to implement the changes, whereas companies that use the LIFO (last-in, first-out) and retail inventory methods are not affected by the update.
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Parker, R. H. (1965). Lower of Cost and Market in
Britain and the United States: An Historical Survey. Abacus, 1(2), 156-172.
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Wampler, Bruce; Holt, Travis (January 2013)."Valuing
Inventory at the Lower of Cost or Market."
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