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Basic Question 6 of 26
The amount of the inventory write-down reduces ______.
II. assets
III. stockholder's equity
I. net income
II. assets
III. stockholder's equity
User Contributed Comments 10
| User | Comment |
|---|---|
| rana1970 | how net income is reduced |
| apatters | how is net income reduced? anybody? |
| thomama | it's considered an expense in the period the loss occurs and is charged against revenue, thus reducing net income. |
| johntan1979 | Inventory write-down = Lower inventory How I always figure how this affects other accounts in the income statement or balance sheet is equating it with the effect of LIFO vs FIFO. 1. LIFO results in lower inventory, hence lower NI. 2.Inventory is a current asset. 3. Lower NI = Lower stockholder's equity because of lower retained earnings |
| Shaan23 | How is anybody confused about this? A write down means the inventory is valued lower and the lower value is considered an Expense. Straight from the notes. Expenses decrease NI. |
| Amrokken | good explanation JT 1979 |
| NOBA | better still, write off of inventory implies lower value of closing inventory which leads to lower income (opening inventory + purchases = cost of goods available for sale. COGAFS less closing inventory = COGS. if the value of closing inventory is low, probably brought about by write off of inventory, the COGAFS is high and the gross profit is low - apparently the NI too. Closing inventory /stock is an asset - current asset - so reduced total assets. Ultimately NI (low) that is not paid out as dividend - retained earning is added to equity . Which is invariably reduced too. |
| choas69 | if one thing i learned frm analystnotes is if the bullet points in the questions were used were I II II IIIV etc then its not one answer but still i always forget |
| Freddie33 | Johntan is a CFA legend |
| mali97 | inventory write down = higher COGS higher COGS = lower net profit .. easy |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe the measurement of inventory at the lower of cost and net realisable value and its implications for financial statements and ratios
CFA® 2025 Level I Curriculum, Volume 2, Module 6.