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Under many countries’ accounting standards, including U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), inventory must be recorded at the lower of cost, market value, or net realizable value, depending on the inventory costing method used. This means that inventory must be valued at its acquisition cost, except when the cost is determined to be higher than the net realizable value, in which case the difference should be recognized as a loss in earnings in the period it occurs. Failing to write down or write off inventory results in overstated assets and the mismatching of cost of goods sold with revenues.

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