CFA Practice Question

CFA Practice Question

The following information pertains to Corel's 2011 cost of goods sold:

Inventory, 12/31/2010: $90,000
2011 purchases: $124,000
2011 write-off of obsolete inventory: $34,000
Inventory, 12/31/2011: $30,000

The inventory written off became obsolete because of an unexpected and unusual technological advance by a competitor. In its 2011 income statement, what amount should Corel report as cost of goods sold?
A. $184,000
B. $150,000
C. $124,000
Explanation: Beginning Inventory + Net Purchases - Cost of Goods Sold = Ending Inventory or
Beginning Inventory + Net Purchases - Ending Inventory = Cost of Goods Sold
$90,000 + $124,000 - $30,000 = $184,000
In this case, we also have obsolete inventory that was written off this year. Therefore, obsolete inventory will reduce cost of goods sold to $150,000 ($184,000 - 34,000).

User Contributed Comments 17

User Comment
xqcc Intuitively, when you have inventory write-off, COGS should increase in accounting term (more cost associate with sales). For example, CISCO had 2.2 billion inventory write-off, the same period COGS increased by 2.2 billion. The question should be what is the real physical COGS. The write-off effect should be already taken into the ending inventory figure. I think $184,000 is the accounting COGS, and $150,000 is the real COGS.
jason without the written-off, the ending inventory would be 34000 + 30000 = 64000. Therefore the COGS should be 90000 + 124000 - 6400 = 150,000. The written-off amount cannot go to the COGS amount, but rather it is an extraordinary amount.
Mutizwa how can written off inevntory reduce CCOGS. It should increase COGS if it taken above the line. may it write-back???
wollogo I agree with Jason - it would be far more logical to assume that the ending inventory balance reflects the inventory write off.
itconcepts I also had it wrong, but consider this. An integrated inventory accounting system would only take the physical COGS to that account, in real time. So the ending inventory figure would still reflect the $34,000, until it is written off. So even tho I understand their reasoning, it's still ambiguous in terms off the timing of the write-off entry.
steved333 You know, I have to agree with Mutizwa. The write off suggests that the costs for that inventory will never be recovered. Intuitively, you would be led to believe that COGS would be greater since that cost has been paid.

But I understand that when you write it off, it reduces Inventory, thereby reducing COGS by way of accounting mathemetics.
Birdy101 by including the write off in the COGS, comparison to different years, competitiors would not be so easy, thus makes sense to put it in extraodinary...
Munyoli Also, capitalizing such writes off is tantamount to capitalizing inefficiencies. It should hit the income stmt on a different line item, where it would be easy to traced.
ROJIE My 2 cents worth, in a real sense when you do a write-off it is supposed to be charged to allowance for inventory obsolescence. Since there is no allowance given in the problem, then write-off equals allowance. Now, the twisted point here is how it is possible having a $34K write-off out of $30K inventory (that is insane!!). Now, the logical assumption is that the $30K is already net of whatever inventory that was written off. Therefore following the same formula, A must be the correct answer. I would assume that the $34K obsolete was written off during the year and that was part of the total inventory (beg + purchases) and the $30K is net remaining inventory.
pdubyac Writing off E&O inventory is a period expense and not taken to COGS.

Thus, it inpacts earnings, but not operating metrics (e.g., by increasing COGS).

Answer to this questions is simple: Purchases + (Begin Inventory - End Inventory) = COGS
mindi so then is inventory write off is an operating expense or an extraordinary item?
tommyguard3 The way I looked at it was

They start with $90,000 of inventory
They write off $34,000 of inventory so without any sales they only have $56,000 of inventory.

Then do your usual Beginning + Purchases - Ending = COGS

May not be exactly technically correct, but will give you the correct answer and is easier to wrap your head around.
PeterL Companies definitely include inventory write downs in COGS. Look at Micron in late 08.
alles According to Schweser, an inventory write-off will reduce ending inventory and increase COGS. However, since no cash flow is associated with the write-off, it should be subtracted to arrive at CASH PAYMENTS TO SUPPLIERS, and not COGS.
ashish100 Beg. Inventory + Purchases - COGS - Cost of goods thrown away = Ending Inventory.

Thats the bottom like coz stone cold said so.
Horv Everyone here wrote the correct answer in their complaints. Cost of good SOLD, SOLD being the key word. You did not sell your obsolete inventory, you disposed of it.
april0805 For the written down inventory, I believe it is not part of COGS since it is abnormal case... In accounting cases, inventory write-down is considered as part of COGS if the amount is insignificant. The question is kinda confusing...
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