A company has obsolete inventories and it must write off these inventories. How does writing off inventories impact on the company’s financial statements?
1. Stock increases
2. Stock decreases
3. Profit increases
4. Profit decreases
An inventory write-off is a process of removing from the general ledger any inventory that has no value.
Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 – $10,000 = $90,000. Next, the inventory write-off expense account will be increased with a debit to reflect the loss.
The expense account is reflected in the income statement, reducing the firm’s net income and thus its retained earnings. A decrease in retained earnings translates into a corresponding decrease in the shareholders’ equity section of the balance sheet.
If the inventory write-off is immaterial, a business will often charge the inventory write-off to the cost of goods sold (COGS) account. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. Most inventory write-offs are small, annual expenses. A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss.
– CIPS study guide page 86-90
– Inventory Write-Off
LO 2, AC 2.1
Which of the following costs can be classified as ‘acquisition costs’?
Invitation to tender and order processing costs
Invoice processing and supplier selection costs
Goods inspection and total ownership cost
Total input costs and invoice processing cost
Which of the following is the correct statement about total ordering cost?
Typically, ordering costs include expenses for a purchase order, labor costs for the inspection of goods received, labor costs for placing the goods received in stock, labor costs for issuing a supplier’s invoice and labor costs for issuing a supplier payment. These costs are irrelevant from the size of the order and are incurred every time a firm places an order.
The total ordering cost will be equal to ordering cost per order multiply with number of orders.
LO 2, AC 2.2
Warehouse automation involves the use of technology to perform as many warehousing tasks as possible. There are several benefits that can be gained by using automation in a warehouse. They are…
Correct Answer:D
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