Final answer:
An inventory writedown is a reduction of inventory's book value on the balance sheet to its lower market value, typically due to obsolescence, excess supply, damage, or changes in market prices.
Step-by-step explanation:
An inventory writedown is an accounting process where the value of the inventory is reduced on the balance sheet to reflect its current market value rather than its higher book value. This writedown occurs when the inventory's market value has decreased below the cost at which it is currently recorded on the books. There are several reasons that might lead to an inventory writedown, which include obsolescence of products, excess supply, damage, theft, or market changes which cause the selling price to drop below the cost.
For example, if a company has a batch of electronic goods that have become outdated due to new technology, these items may have to be sold at a price lower than the original cost. This situation necessitates a writedown of the inventory to align the balance sheet with the realizable value of these goods.