Question

The Standard Company’s analysis of its inventory revealed that the net realizable value is $340,000 whereas the current amount in the Inventory account shows $365,000. What is the effect of the required writedown of inventory on the year-end financial statements?

Group of answer choicesPretax income will increase by $25,000 and Inventory will decrease by $25,000.
Standard Company will owe its inventory suppliers $25,000 less.
The inventory on the balance sheet will be lower by $25,000 and Cost of Goods Sold on the income statement will increase by $25,000.
There will be no effect on the statements as the inventory’s net realizable value may increase during the next year.

Answer 1

The write-down of Standard Company's inventory will reduce the balance sheet inventory by $25,000 and increase the Cost of Goods Sold by the same amount, decreasing the pretax income.

Step-by-step explanation:

The required write-down of inventory from the Standard Company's books will have a two-fold effect on the year-end financial statements. Firstly, the inventory amount on the balance sheet will be reduced by $25,000, reflecting the decrease from the reported $365,000 to the net realizable value of $340,000. Secondly, this write-down will lead to an increase in Cost of Goods Sold (COGS) on the income statement by an identical amount ($25,000), effectively decreasing the company's pretax income by the same figure. It's important to note that the write-down will have no impact on the amount Standard Company owes to its inventory suppliers nor is it put off based on the possibility of future value increases. The primary intention of this adjustment is to adhere to the accounting principle of conservatism, ensuring that inventory is not overstated.