CFA Practice Question

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CFA Practice Question

The amount of the inventory write-down reduces ______.

I. net income
II. assets
III. stockholder's equity
Correct Answer: I, II and III

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 ..

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