Question

Probes, Inc. wrote down its inventory to the lower replacement value. The effect on Probes' accounting equation includes a(n) _________. (check all that apply)

1) decrease in stockholders' equity
2) decrease in assets
3) increase in assets
4) decrease in liabilities

Answer 1

Writing down inventory results in a decrease in both assets and stockholders' equity in a company's accounting equation, reflecting the reduced value of the inventory on the balance sheet and the owners' residual interest.

Step-by-step explanation:

When Probes, Inc. wrote down its inventory to the lower replacement value, the effect on Probes' accounting equation includes a decrease in assets and a decrease in stockholders' equity. Writing down inventory means that the reported value of inventory on the balance sheet is reduced, which reduces the total assets. Consequently, as the asset value decreases without a corresponding decrease in liabilities, the stockholders' equity, which is the residual interest in the assets of the entity after deducting liabilities, also decreases.