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The information contained in this book could save your business thousands of pounds by not having to write off distressed inventory.
Accounting for Distressed Inventory
Over time, your company’s inventory can perish or become obsolete. If you do not reduce its value on your books, your annual financial statements may be misleading to investors and lenders. To correct this problem, generally accepted accounting principles, or GAAP, allow certain adjustments for distressed inventory. If the inventory is not completely worthless, the company may be able to recover some of its investment by selling it as salvage or donating it to charity for a tax deduction.
When Does Inventory Become Distressed?
When your inventory should be considered distressed depends on the type of business your company conducts. If you sell food, cosmetics, chemicals or other perishable items, the inventory becomes distressed as soon as it passes its expiration date. Sellers of hard goods, such as auto parts or computer accessories, must periodically evaluate their inventory to see if it has become obsolete or is selling below market value.
Value of Distressed Inventory
According to GAAP, you must record your inventory at the lower of cost or market value. For distressed inventory, the current market value will always be lower than its initial cost. You must estimate market value based on your company’s ability to actually sell the product. For obsolete technology, the only remaining value may be the parts used to make the product. If the inventory is subject to physical degradation, you must also evaluate its condition when estimating the current market value.
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