## Wednesday, February 6, 2008

### How to solve for lower of cost or market (LCM)?

A Golf Wholesale Company’s Merchandise Inventory was made up of the following items on December 31, 2007:

 Items Units Cost per unit Market Value per unit Drivers Tiger Woods 20 \$30.00 \$25.00 John Daly 10 \$50.00 \$20.00 Irons Phil Mickelson 40 \$10.00 \$15.00 Vijay Singh 50 \$40.00 \$25.00

Assuming that the lower of cost or market (LCM) method is applied to individual items, the adjusting entry on December 31, 2007 will increase Cost of Goods Sold by for the Golf Wholesale Company:

First, figure out the Total Cost (multiply units x cost per unit) and the Total Market Value (multiply units x market value per unit) for each individual item on the list
Total Cost Total Market Value
Tiger Woods 600 500
John Daly 500 200
Phil Mickelson 400 600
Vijay Singh 2000 2250

Then total cost = \$3500
Total MV (The value of the LCM so 500 + 200 + 400 + 2000) = 3100

Then just subtract \$3500 - \$3100 = \$400

LCM for the Golf Wholesale Company is \$400

This is the number that must appear on financial statements.