Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet.

Answer and Explanation:

Inventory is an asset and is posted on the asset side of the balance sheet. As per accounting standards regarding inventory valuation, it can be either valued at historical cost or at market price, whichever is lower.

Historical cost is the cost at which asset was acquired. Market price is the price which would be received if the asset is replaced as on the date on which balance sheet is prepared. Inventory is valued at lower of the above mentioned costs.

Inventory should be reported at the current market value of replacing it when lower than cost.

Explanation:

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