why is the lower of cost or market lcm method used 
the lower of cost or market lcm method lets companies record losses by writing down the value of the affected inventory items this value may be reduced to market value which is defined as the middle value when comparing the cost to replace the inventory the difference between the net realizable value and the typical profit on the item and the net realizable value of the item the amount by which the inventory item was written down is recorded under cost of goods sold on the balance sheet the lcm method is part of generally accepted accounting principles gaap used in the united states and in international commerce almost all assets enter the accounting system with a value equal to acquisition cost gaap prescribes many different methods for adjusting asset values in subsequent reporting periods in 2017 the financial accounting standards board fasb issued an update to its code and standards that affect companies that use the average cost and last in first out lifo methods of inventory accounting companies that use these two methods of inventory accounting must now use the lower of cost or net realizable value method which is more consistent with international financial reporting standards ifrs application of the lower of cost or market lcm rulethe lower of cost or market lcm rule traditionally applies to companies with products that become obsolete the rule also applies to products that lose value due to a dwindled current market price which is defined as the current cost of replacing outdated inventory provided that the market price isn t larger or smaller than the net realizable value which is essentially the projected selling price minus disposal fees the lcm rule was recently changed making things easier for businesses that do not use the retail method or the last in first out lifo method under the new guidelines the measurement can be solely restricted to the lower of cost or net realizable value 