Abstract The principle of valuing current assets in general, and inventories in particular, at "cost or market, whichever is lower" has been thoroughly damned, and still remains "firmly fastened on modem accounting." The fact that it is logically inconsistent, aids in distortion, and is often actually un-conservative, is almost as much neglected by accountants. No one familiar with accounting theory or practice needs to be reminded of the inconsistencies and distortions caused by blind adherence to valuations at the lower of cost or market. Many textbooks advocate, but few companies practice, the reduction to a lower market value by means of a reserve for decline in inventory and a charge to an extraordinary loss, rather than swallowing the reduction in cost of sales. This is recommended in an effort to eliminate the misconceptions and the misleading effect, on the results of the following year, of cost or market valuations. More often, however, the inconsistencies and distortions have been ignored or rationalized because of the supposed need for the application of the rule on conservative grounds.
Sidney I. Simon (Mon,) studied this question.