When is a revaluation inventory adjustment necessary?

A revaluation inventory adjustment is necessary when items become obsolete and must be sold at a lower price. This adjustment reflects the reduction in the value of inventory due to changes in market conditions or the condition of the items themselves. When items become obsolete, their original cost may no longer be applicable, and failing to adjust their value can lead to an inflated inventory valuation on the balance sheet.

Revaluation ensures that the financial records accurately represent the economic reality of the inventory's worth. It is crucial for ensuring that profit and loss statements reflect the true performance of the business, especially when inventory items need to be liquidated at a reduced price to clear out stock that is no longer viable for sale at its original valuation.

While selling out items, receiving stock, or dealing with damaged inventory may affect inventory management practices, they do not necessarily require a revaluation adjustment in the same way that obsolescence does. Hence, the adjustment is specifically tied to the need to reflect a lower market value due to items being obsolete.