Running head: ACCOUNTING

AC300: Accounting
Student Name:
Institutional Affiliation:

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AC300: Accounting
Applying Lower of Cost or Market

What is the Purpose of the Lower of Cost or Market Methods?

The LCM method serves three main purposes consistent with GAAP. Firstly, it ensures
verifiable, realistic, and objective reporting. Given that stock and some security holdings
contribute toward the value of current assets in the balance sheet and consequently affect the
evaluation of the firm`s financial position and performance, it is important that the values
reported reflect the actual cost or current market value, or replacement cost. Unrealistic figures
can give a misleading picture of the company`s performance and financial position. Secondly, it
is intended to fulfill the matching concept whereby, revenues have to be recognized in the same
accounting period as the expenses incurred in generating them (Kieso, Weygandt, & Warfield,
2013).). Using the LCM rule, expenses, such as loss of inventory value, are reported in the same
period as the revenue from the sale of that inventory. Lastly, it fulfills the conservatism principle.
Where alternative valuation methods exist, the method selected should be the one that results in a
lower asset value. By using LCM, the reported value for inventories and securities is more
conservative.
What is Meant by Market?
In applying the LCM rule, the market value is the replacement cost, and the market value
falls between the upper limit (ceiling) and the lower limit (floor). The ceiling is bet realizable
value (NRV). If replacement costs are greater than NRV, the LCM market value is used instead
of NRV. On the other hand, the floor is NRV less normal profit. Where replacement cost is less
than NRV less normal profit, LCM market value is used in the place of the market floor (NRV
minus normal profit).

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Business Law

Under What Theory Might Darla be Liable?

Darla can be liable under the insider trading theory. She had eavesdropped on the
conversation and made profit from the deal. Therefore, the case is strictly connected to insider
trading. The SEC rule 10b-5 clearly stipulates what amounts to insider trading. In the event that
insider trading occurs, any person who used insider trading is liable.
Do The Circumstances of this Case Meet All of the Requirements for Liability Under that
Theory? Explain.
Under the theory, there are various requirements that have to be met. They include:
manipulation/deception, materiality, the transaction must be linked to the purchase or sale of
security, caused loss, standing, and damages (Miller & Jentz, 2010). Evidently, from the case
given, all these requirements have not been met since although the transaction is connected to
purchase or sale, it did not include the aspect of deception and neither did it cause losses or
damages to the investors.
Examine the SEC Rule 10b-5
According to this rule, any individual who possess material information that has not been
disclosed publicly shall disclose it publicly or else barred from trading. Where an individual is
found guilty of using insider information with the goal of manipulating the market, he/she should
be subjected to liability of insider trading.
Discuss whether or not Darla was liable under the misappropriation theory.
Darla was not liable under the misappropriation theory since she had no fiduciary duty to
disclose the said information to shareholders prior to trading the shares.

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References

Kieso, D., Weygandt, J., & Warfield, T. (2013). Intermediate accounting (15th ed.). Wiley.
Miller, R. & Jentz, G. (2010). Fundamentals of business law (1st ed.). Mason, Ohio: SouthWestern/Cengage Learning.