What is ‘Obsolete Inventory’
An obsolete inventory item is defined as inventory that has reached the end of its product life cycle and has not seen any sales or utilization for a certain length of time, which is generally stipulated by the industry in question. This form of inventory must be written down, and it might result in significant losses for a corporation.
Dead inventory and surplus inventory are terms used to describe this kind of inventory.
Explaining ‘Obsolete Inventory’
Large levels of outmoded inventory are a red flag for investors because they may be an indication of a number of issues, including poor product design, inaccurate demand forecasting, and bad inventory management. By examining the quantity of outmoded inventory a firm generates, investors may get an understanding of how well the product is selling as well as how efficient the company’s inventory management system operates.
Obsolete Inventory FAQ
How do you determine obsolete inventory?
According to widely accepted accounting rules, outmoded inventory must either be written-down or written-off in the financial accounts in order to account for the decrease in value of the inventory (GAAP). It is necessary to do a write-down when the market value of an inventory falls below its cost as stated on the financial accounts.
What causes obsolete inventory?
Inventory obsolescence is often caused by organizations failing to comprehend the product life cycles of the products they carry and, as a result, failing to recognize the warning indications that an item is approaching the end of its useful life.
Can you write off obsolete inventory?
Is it possible to write off merchandise that has expired? It is permissible to write off expired inventory as if it were lost or destroyed since it has lost its market worth and cannot be utilized for the reasons for which it was designed in the first place.
Further Reading
- Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management – meridian.allenpress.com [PDF]
- Lowest value principle implementation in inventory measurement of financial statements of the enterprises – www.richtmann.org [PDF]
- Detecting fraudulent financial reporting using financial ratio – www.emerald.com [PDF]
- Inventory management under financial distress: an empirical analysis – www.tandfonline.com [PDF]
- Detecting false financial statements using published data: some evidence from Greece – www.emerald.com [PDF]
