Question

At the end of a reporting period, ABC determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjustment to write down inventory to net realizable value?

A) Decrease total assets.
B) Decrease net income.
C) Decrease total assets and net income.
D) Increase retained earnings.

Answer 1

Decrease total assets and net income.

Step-by-step explanation:

There is an inventory write down because the value of inventory has decreased. The net realizable value of inventory is less than its cost.

Inventory write down involves expensing a part of the inventory asset in the current period.

As a result of the write down, inventory would decrease. Inventory is part of total assets. Thus, total assets would decrease

Also, cost would increase because of the write down and so net income would decrease.