What method is used to establish a value for severely damaged inventory?

The cost-to-sales ratio method is employed to establish a value for severely damaged inventory by evaluating the relationship between the cost of the inventory and the expected sales value. This method allows companies to estimate how much of the inventory's value can be recovered based on realizable sales projections.

In cases of severe damage, inventory may not be salable at its full cost and thus requires a valuation reflecting its reduced marketability. This method uses financial data to analyze previous sales performance relative to inventory costs, allowing for an adjusted valuation that meets accounting standards and reflects economic realities.

Other methods mentioned have different applications; the market value method takes the current market prices into account, the historical sales method relies on past sales data without considering the current state of inventory, and the inventory write-down method is an accounting action to recognize losses but does not inherently establish a specific value in relation to cost and sales. The cost-to-sales ratio method provides a more dynamic approach to valuing damaged inventory in light of actual sales potential.