Question

At the end of a reporting period, a company determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjustment to write down inventory to net realizable value?

• Decrease net income.

• Decrease total assets.

• Decrease total assets and net income.

• Increase retained earnings.

Answer 1

Answer : Decrease total assets and net income

Note : An inventory write down will affect both the Statements of profit and loss account and balance sheet. ie It is treated as an expense, which reduces net income and such write down reduces inventory value which results decrease in total asset. Journal entry will be

Loss on Inventory write down (expense)	70,000
Inventory		70,000

($3,00,000 - $2,30,000 = $70,000)

If you consider retained earnings in this scenario, the inventory write down on the income statement will results decrease in retained earnings (not increase) by the same amount.

Hence, inventory write down will results decrease total assets as well as net income.