Is the cost of inventories typically written down to reflect market changes?

In accounting for inventories, the principle of lower of cost or market applies, meaning that inventories should be valued at the lower of their original cost or their net realizable value. The correct approach is that the cost of inventories is not typically written down solely due to market fluctuations unless there are issues affecting their usability or realizability.

When market prices drop, it does not automatically necessitate a write-down unless the net realizable value falls below the cost due to overall factors impacting the inventory's value, such as damage, deterioration, obsolescence, or changes in demand that render them unsellable or significantly reduced in value. This principle protects against recognizing losses in value prematurely and ensures that financial statements reflect true value based on usable asset conditions. Thus, the focus is on the usability and realizability of the inventory rather than just market movements.