CFA Practice Question

There are 520 practice questions for this study session.

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)?

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?
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