Companies using which of the following inventory costing methods should apply the lower of cost or market (LCM) rule to their inventory?

• A. Retail inventory method only
• B. FIFO and weighted-average cost
• C. Specific identification only
• D. LIFO only

Answer: (B)

Verified step by step guidance

1. Understand the concept of the lower of cost or market (LCM) rule: This accounting principle requires companies to report inventory at the lower value between its historical cost and current market value. It ensures that inventory is not overstated on the financial statements.
2. Identify the inventory costing methods mentioned in the problem: FIFO (First-In, First-Out), weighted-average cost, specific identification, LIFO (Last-In, First-Out), and retail inventory method.
3. Recognize which inventory costing methods typically apply the LCM rule: The LCM rule is commonly applied to inventory methods like FIFO, weighted-average cost, and LIFO because these methods involve valuing inventory based on cost flows and market conditions. Specific identification and retail inventory methods may not always require LCM application due to their unique valuation approaches.
4. Analyze why FIFO and weighted-average cost are correct answers: FIFO assumes the oldest inventory is sold first, while weighted-average cost calculates an average cost for all inventory. Both methods can result in inventory values that need adjustment under the LCM rule if market conditions cause a decline in value.
5. Conclude that companies using FIFO and weighted-average cost should apply the LCM rule to their inventory, as these methods are sensitive to changes in market value and historical cost.