Lower of cost or market

Lower or cost or market is an inventory method involving decreasing the cost of inventory items that are worth less than the original purchase price.

Let’s say you bought Dick Tracy T-shirts for $5 with the intention of selling them for $20 when the new Dick Tracy movie was released. The movie was released to terrible reviews and no one wanted to buy your T-shirts. You figured $2 was the very most you could get for your shirts. Using lower of cost or market you would reduce the value of your inventory to $2 a shirt. If the shirts suddenly started selling for $40, you would not increase the cost of your inventory. Lower of cost or market involves the lowering the cost of inventory if it falls below purchase price, but never raising it.

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