Inventory - cost versus NRV: write-downs (for the @CFA Level 1 exam) 

That’s great! Thanks for sharing🙏

Thank you 🙏

Thank you Syed! That means a lot!

Yes, financial reporting is heavily rooted in the prudence concept

Ok, so cost only includes the costs suferred to this date. The delivery expense is a future cost which will only be borne when the products are sold and delivered. They do not therefore enter the computation of costs incurred to date.

Thank you, you are very welcome!

That's the plan but it takes time :) Thanks for the kind words!

Thank you for the feedback 🙏👍

Yes, sure. In the right hand of the equation, a write-down decreases END INV. As this term comes with a minus in the equation, lower END INV increases the COGS number. More importantly, a write-down is an expression of the company losing faith in its ability to sell inventory at a price which would cover the cost of purchase. This loss of faith is counted as a current period cost/loss which is taken to P&L under COGS.

@@letmeexplaincfa Thanks, so ending inventory being lower due to a write-down is recognised on P&L? This applies to both GAAP and IFRS, right? However if there is a reversal this gain is only allowed for IFRS and still on P&L? Why not an allowance(+/-) account directly on the balance sheet?

Ok, so a write down is a reduction in the value of an asset. Any time you do that, you need to post a negative entry to P&L so as to ultimately balance the balance sheet. Remember that the profit or loss from the P&L ends up showing as a positive or negative entry within Equity. So, a minus (cost/loss) within P&L has the ultimate effect of reducing Equity, which keeps the balance sheet in equilibrium. The same rule applies when you depreciate a long term asset (asset down and P&L down), when you sell an item of inventory (assets down and P&L down via COGS) and when you do a write down.

Thanks, there are videos on the FIFO, LIFO, AVco and perpetual valuation on the channel.