The lower-of-cost-or-market (LCM) rule can be applied to which of the following?

• A. Only raw materials inventory
• B. Only the total inventory as a whole
• C. Only finished goods inventory
• D. Each individual inventory item

Answer: (D)

Verified step by step guidance

1. Understand the lower-of-cost-or-market (LCM) rule: This accounting principle requires inventory to be reported at the lower of its historical cost or current market value. It ensures that inventory is not overstated on the financial statements.
2. Recognize the scope of application: The LCM rule can be applied to individual inventory items, categories of inventory, or the total inventory as a whole. However, the most conservative and commonly used approach is applying it to each individual inventory item.
3. Identify inventory types: Inventory typically includes raw materials, work-in-progress, and finished goods. The LCM rule applies to all these types, but the question specifies the application to individual items rather than categories or totals.
4. Clarify why individual inventory items are used: Applying the LCM rule to each item ensures the most accurate valuation, as it accounts for specific market conditions affecting individual items rather than averaging values across categories or the total inventory.
5. Conclude the correct application: Based on the LCM rule, the correct answer is that it can be applied to each individual inventory item, ensuring compliance with accounting standards and accurate financial reporting.