The lowest value principle is a method of valuating material stocks for balance sheet purposes. The aim of this method is to valuate stocks as accurately as possible according to the recognition-of-loss principle. It is based on the following:

• Profits that exist solely on the books as a result of changes in market prices are to be avoided. For example, if a material is procured at a price of $10 and the current market price is $15, a profit of $5 would therefore be expected for each unit of measure. However, this profit should not be included in the balance sheet until it has actually been made. Thus the material continues to be valuated at a price of $10.
• Expected losses are included in the balance sheet. For example, if a material is procured at a price of $10 and the current price is $7, the material is only valuated at $7.
• Material stocks that are no longer required lose their value. Therefore, you should check a material's movement rate or range of coverage. A slow movement rate or large range of coverage usually means that a material may no longer be required in the future. Instead of waiting to post the loss when you eventually scrap the material, you devaluate the material price when the material displays slow movement or a large range of coverage.