When applying the lower-of-cost-or-market (LCM) rule to inventory with more than two types, which of the following methods is most commonly used under U.S. GAAP?

• A. Apply the LCM rule to the total inventory as a whole.
• B. Apply the LCM rule to each individual inventory item separately.
• C. Apply the LCM rule to groups of similar inventory items.
• D. Apply the LCM rule only to finished goods inventory.

Answer: (B)

Verified step by step guidance

1. Understand the lower-of-cost-or-market (LCM) rule: The LCM rule is a conservative accounting principle used to value inventory. It requires that inventory be reported at the lower of its cost or market value, ensuring that potential losses are recognized promptly.
2. Identify the methods mentioned in the problem: The problem lists four methods for applying the LCM rule: (1) applying it to the total inventory as a whole, (2) applying it to each individual inventory item separately, (3) applying it to groups of similar inventory items, and (4) applying it only to finished goods inventory.
3. Review U.S. GAAP guidelines: Under U.S. GAAP, the most commonly used method for applying the LCM rule is to evaluate each individual inventory item separately. This approach ensures the most accurate valuation of inventory and aligns with the principle of conservatism.
4. Compare the methods: While applying the LCM rule to the total inventory or groups of similar items may be simpler, these methods can lead to less precise valuations. Applying the rule only to finished goods inventory is not comprehensive and does not account for raw materials or work-in-progress inventory.
5. Conclude the correct method: Based on U.S. GAAP, the correct method is to apply the LCM rule to each individual inventory item separately, as this provides the most detailed and accurate valuation of inventory.