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    Tests for ceiling and floor value of inventory using the LCM rule

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    Year-end inventory cannot merely be based on a company's cost and whichever cost flow method the company is currently using. It needs to be further tested under the Lower of Cost or Market Rule for the potential need to mark it down. What are the "tests" used to determine the ceiling and the floor values to which the market value of the inventory is applied in order to determine what the "market" value is to the company?

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    Solution Preview

    To determine inventory reduction amounts, the three tests are:

    1. Deterioration, damage and theft
    2. Replacement cost
    3. Sales demand


    1. Inventory that is perishable, deteriorated, damaged or stolen
    2. Inventory that has permanently decreased in cost such as high tech items
    3. Inventory with a permanent demand decrease ...

    Solution Summary

    This solution explains the tests for the ceiling and floor values of inventory using the Lower of Cost or Market Rule in order to determine what the market value of inventory is to a company. The solution is accompanied by references to support the explanation and for further research.