Question

If year-end inventory is reduced from cost to a lower net realizable value, which of the following accurately depicts the results?

a. Cost of goods sold is increased and beginning inventory of the next period is decreased by the same amount.
b. Cost of goods sold is reduced and beginning inventory of the next period is reduced by the same amount.
c. Year-end inventory is reduced and cost of goods sold is reduced by the same amount
d. The capital account balance is increased and beginning inventory of the next period is reduced by the same amount.

Answer 1

The reduction of year-end inventory from cost to a lower net realizable value increases the cost of goods sold and decreases the beginning inventory of the next period by the same amount.

Step-by-step explanation:

If year-end inventory is reduced from cost to a lower net realizable value, the accurate depiction of the results is that cost of goods sold is increased and beginning inventory of the next period is decreased by the same amount. This is because the write-down of inventory to the lower net realizable value creates an expense that is recorded in the current period as part of the cost of goods sold. As a result, the beginning inventory for the following period is lower because it reflects the reduced value of the remaining inventory.