Question

Freeze Corporation uses the lower of cost or net realizable value method to write down inventory. Freeze determines that the inventory should be written down by $1,000. The effect on the financial statements is to ______.

Answer 1

The journal entry to record the write down is:

Dr Cost of goods sold 1,000

Cr Inventory 1,000

Since cost of goods sold increases, then net income (income statement) will decrease. A decrease in net income will also result in lower retained earnings (balance sheet).