1. What is Inventory Write-Down?

Inventory Write-Down is a reduction in the book value of inventory recorded on the balance sheet to reflect its impairment. It occurs when the market value of inventory falls below its historical cost, requiring companies to adjust their financial statements accordingly.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• Historical Cost — Original cost paid to acquire the inventory
• Lower of Cost or Net Realizable Value — The lower value between original cost and net realizable value

Explanation: This calculation ensures that inventory is reported at the lower of its cost or net realizable value, following conservative accounting principles.

3. Importance of Inventory Write-Down

Details: Proper inventory valuation is crucial for accurate financial reporting. Write-downs prevent overstatement of assets and ensure compliance with accounting standards like GAAP and IFRS.

4. Using the Calculator

Tips: Enter the historical cost and the lower of cost or net realizable value in dollars. Both values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: When should inventory be written down?
A: Inventory should be written down when its net realizable value falls below its historical cost, indicating impairment or obsolescence.

Q2: What is net realizable value?
A: Net realizable value is the estimated selling price minus any estimated costs of completion and disposal.

Q3: How often should inventory be assessed for write-down?
A: Inventory should be assessed at each reporting period (typically quarterly or annually) for potential write-down needs.

Q4: Can inventory write-downs be reversed?
A: Under most accounting standards, inventory write-downs cannot be reversed if the circumstances that caused the write-down still exist.

Q5: How does inventory write-down affect financial statements?
A: Inventory write-down reduces the value of inventory on the balance sheet and creates an expense on the income statement, reducing net income.