Lower of cost or market is an inventory valuation rule that limits recorded
Lower of cost or market, often shortened to LCM, is an inventory valuation rule that requires inventory to be reported at the lower of its recorded cost or a market-based replacement-oriented amount.
The purpose is conservative reporting. If inventory has declined in value, the business should not continue to carry it at an overstated amount.
LCM is one of the traditional ways to recognize inventory losses before the goods are sold. It protects the balance sheet from overstated asset values and reduces the risk that profit is inflated by inventory that no longer supports its recorded carrying amount.
Modern reporting discussions often focus on Net Realizable Value and the Lower of Cost and Net Realizable Value Rule. LCM remains important because many finance and accounting materials still use it as the standard comparison framework.