When a company decides to write down its inventory, it typically has two methods to choose from: the loss method and the cost-of-goods-sold method. The correct answer is c) lower gross profit and net income.
When a company decides to write down its inventory, it typically has two methods to choose from: the loss method and the cost-of-goods-sold method. Let's explore the impact of each method on financial statements:
a) Lower gross profit, but operating income will be the same: This is not accurate because the gross profit is usually directly affected by the inventory write-down method. If the loss method is used, it tends to reduce gross profit.
b) Higher gross profit and lower operating income: This is not correct. The cost-of-goods-sold method tends to have a lower impact on gross profit compared to the loss method, but both methods affect operating income.
c) Lower gross profit and net income: This is generally true. The loss method usually results in a more significant reduction in gross profit compared to the cost-of-goods-sold method, leading to lower net income.
d) Higher gross profit, but net income will be the same: This is not accurate. If the gross profit is higher, it would generally lead to a higher net income, assuming other factors remain constant.
Therefore, the correct answer is c) lower gross profit and net income. The loss method is likely to result in a more substantial reduction in both gross profit and, consequently, net income compared to the cost-of-goods-sold method.