Stock is valued at the lower of cost or net realisable value. The easiest way to illustrate this is using the case of a supplier that sells nuts & bolts.
When doing the annual stock take at the end of financial year the manager realised that they had stock on hand of around $1M, however $200,000 worth was Imperial nuts & bolts i.e., non-metric and no longer able to be sold in the current market. The business could then legitimately write this stock down to nil as the "realisable" or sale value was zero.
The effect of this write-down is that the profit for that year would be decreased by $200,000. It is therefore important to check stock values every year so that slow-moving or obsolete items may be written off at the appropriate time.
Disclaimer: This information is general in nature. So, before acting on this or any other information, it is important to seek professional advice related directly to you and your circumstances. Should you require our assistance, contact your Primarius Team leader, or email us at email@example.com