What can cause the Net Realisable Value to be lower than the cost of stock?

The concept of Net Realisable Value (NRV) refers to the estimated selling price of an inventory item, less any costs of completion, marketing, and distribution. In certain situations, the NRV can be lower than the cost of stock, indicating a potential loss in value for the inventory held by a business.

Obsolescence and changes in demand are key factors that can lead to a reduction in NRV. When inventory becomes obsolete—meaning it is no longer sellable or relevant due to advancements in technology or shifts in consumer preferences—its market value significantly declines. Similarly, if there are changes in demand for a product—such as a sudden decrease in consumer interest—this can lower the expected selling price, thus diminishing the NRV. This situation highlights the importance of continual assessment of inventory; if the market changes, the business's expectations about how much it can sell its products for may need to be recalibrated.

In contrast, factors such as increased demand or improved market conditions would generally lead to a higher NRV, while soaring production costs might affect profitability but would not directly impact the NRV unless it results in reduced market prices due to unsold stock. Hence, obsolescence and changes in demand are clear contributors to a situation