Lower of Cost or Market Method

Basically, it's a method used to record losses in the value of inventory by using the lower value of two sums: the historical value (what it cost to buy originally) and the market value (what you could sell for today on eBay, net of commissions and shipping and hassle from The Man).

If the market value has dropped below the purchase price (historical cost), this method allows the company to show that loss by recording the current market value. Sometimes, inventory is purchased and loses value before it's sold.

Trends move fast, right?

Consider Fingerlings, those little animal dolls that wrap around a digit. All the rage last Christmas, right? But if you owned a toy store, and bought a ton of Fingerlings, you'd pretty much have to sell them by Christmas or risk losing value on them when the demand dropped. If you did end up with a warehouse of Fingerlings at a loss, you'd want to record that loss to show what that asset was really worth.

From a tax minimization perspective, companies usually want to show the lowest profit number possible, so that they're taxed on the smallest amount of profit. Usually, savvy accountants run the math on both sets of computations and just take the best result for their filings.