Why is it necessary to value inventories using the lower of cost or market? Given an example where this would be necessary.
Here is some information for you regarding the lower of cost or market method:
It is a requirement of GAAP in the United States that inventory be recorded at the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory.
The lower of cost and market method has two boundaries on the valuation of inventories. The first is the inventory ceiling, which requires that inventory must be reported no higher than the net realizable value less expenses. The second boundary is the inventory floor, which requires that inventory value be reported at no lower than the net realizable value plus normally attainable profit.
Another good source:
"Lower of cost or market" refers to an accounting inventory valuation method used for financial reporting purposes. ...