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Definition

Current replacement cost

Current replacement cost means the current cost to replace an inventory item.

Companies apply LCM to the items in inventory after they have used one of the cost flow methods (specific identification, FIFO, LIFO, or average cost) to determine cost. Under the LCM basis, market is defined as current replacement cost, not selling price. For a merchandising company, market is the cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities. Current replacement cost is used because a decline in the replacement cost of an item usually leads to a decline in the selling price of the item.

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