Answer
The term “market” in the phrase “the lower-of-cost-or-market” largely means the cost to replace the item by reproduction or purchase. Market is limited, nevertheless, to an amount that should not exceed the net realizable value or ceiling i.e. the estimated selling price in the normal course of business less reasonably predictable costs of completion and disposal and should not be lower than net realizable value reduced by an allowance for an approximately normal profit margin or floor.
Work Step by Step
The “ceiling” covers damaged, shopworn or obsolete items and prevents serious overstatement of inventory. The “floor,” on the other hand, prevents serious understatement of inventory.
