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What is the effect of an inventory write-down on the financial statements?

Practice Questions

Q1
What is the effect of an inventory write-down on the financial statements?
  1. Increases net income
  2. Decreases net income
  3. No effect on net income
  4. Increases assets

Questions & Step-by-Step Solutions

What is the effect of an inventory write-down on the financial statements?
  • Step 1: Understand what an inventory write-down is. It means reducing the value of inventory because it is no longer worth as much as before.
  • Step 2: Recognize that the balance sheet shows the value of a company's assets, including inventory.
  • Step 3: When an inventory write-down occurs, the value of inventory on the balance sheet decreases.
  • Step 4: This decrease in inventory value is recorded as a loss on the income statement.
  • Step 5: A loss on the income statement reduces the company's net income, which is the profit after all expenses.
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