- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 1. Inventory Valuation
CFA Practice Question
In 2014 the book value of a company's inventory was $5 million before a $0.3 million write-down was recorded. In 2015, the fair value of the company's inventory was $0.5 million greater than the carrying value. Which of the following statements is (are) false (under IFRS)?
II. In 2015 the company's COGS would decrease by $0.5 million due to the reversal.
III. In 2015 the company would record a $0.3 million recovery as a gain.
IV. In 2014 the company would record a $0.3 million loss due to the write-down.
I. In 2014 the company's COGS would increase by $0.3 million due to the write-down.
II. In 2015 the company's COGS would decrease by $0.5 million due to the reversal.
III. In 2015 the company would record a $0.3 million recovery as a gain.
IV. In 2014 the company would record a $0.3 million loss due to the write-down.
Correct Answer: II only
The company is limited to a $0.3 million recovery, as this was the original write-down.
User Contributed Comments 14
| User | Comment |
|---|---|
| pburkhard | why is I. true? |
| peteSP | it's not.. unlikely they will sell the stock for the .3 m w down, so only ii is correct |
| bundy | had it right...read the question wrong which are false!!! |
| Dsatti | ... I still don't get it?? |
| Gleeder | 0.3 must be increase costs on the income statement somewhere at the time of write down - so under COGS makes sense. That's the only logic I can see. Anyone else? |
| suzette | as per the reading any write-down is included in COGS.. |
| poomie83 | So write down isnt included against impairement expense? |
| quanttrader | change in cogs = - change in inventory ie inventory write down of 0.3 mill implies cogs increases 0.3 mill |
| gulfa99 | Read twice before u answer. This one got me ;( |
| robbiecow | Example: Beg. Inv. = 500 Purchases = 1000 End. Inv. = 800 COGS = 1000 - 800 + 500 = 700 Let us now write down inventory by 200 and ending inventory will go to 600. COGS = 1000 - 600 + 500 = 900 |
| Yrazzaq88 | It's false because we don't adjust for Fair Value until the inventory has been sold. |
| Davidrh | Why can the reversal (of 0.5m) be greater than the original write-down of 0.3m? |
| pigletin | its about math. what you buy and your beg. inventory do not change, but your end inventory value go down, so your cogs must go up. |
| Patdotcom | I am with Davidrh. The answer says that it is II but then the explanation goes on saying there is a limit of 0,3...then, how II can be the right answer? |