A company that is in production or selling of goods, almost definitely has some inventory. It’s an asset that the company is able to use for making sales and thus earning money. This inventory is held for certain product lines, certain markets or for certain companies and people. If something in the course of business of the company or on the market changes, this inventory is ‘under attack’. No, not literally, but the value of it through falling or non-existing sales, negative effect on selling prices or decrease in populations ability to buy those goods. All those conditions indicate that company’s inventory may be overvalued.

Essentially inventory is an asset and as such is recognized at fair value, which almost always is preferably its market value less cost needed to make the sale. If the selling prices are falling through demand-offer ratios, it may be that the company is earning losses through sales and as such the value of the inventory needs to be written down. In such case it’s written down to ‘net realizable value’ meaning market value less costs needed to make the sale. So watch out for those reducing selling prices. If your product is making losses, the first thing to do, is write-down the value, but for future purposes, think for alternatives – cease the production or sales in full, change the materials for cheaper ones or hope it’s just one-time thing and won’t happen again.

In the case where the sales are decreasing, reducing the value may however not be an option. If there is reason to believe that the company may not be able to sell some part or any of the particular goods, it’s an indication that they are so called ‘slow’ or ‘non-movers’. As such, they may be used for something else, sold back to the supplier depending on the agreement clauses, sold to someone else who may be able to use the goods or simply trashed depending on the type of inventory obviously.

At the balance sheet date the inventory should not include any goods or materials that the company is unable or unwilling to use or that is to be expected to be sold below their cost price. For all such inventory items, the revaluation needs to be done and as a result a ‘provision’ may be created. Note however that for goods definitely out of production, a provision is not acceptable and such goods need to be taken out from the balance sheet in full.