Question

What does the “write-down” mean?

What journal entry would Abercrombie & Fitch have made to write down its merchandise inventory during the year ended January 30, 2016?

What impact would the write-down of inventory have had on Abercrombie’s assets? Liabilities? Equity?

What impact would the write-down of inventory have had on Abercrombie’s expenses? Gross margin? Net income?

What impact, if any, would the write-down of inventory have had on Abercrombie’s current ratio?

From an investor standpoint, do you think that the effect of the inventory write-down should be considered when evaluating Abercrombie & Fitch? Explain.

Answer 1

Write down mean charging to the profit and loss account instead of carrying the value to the balance sheet. This is done because of there will not be any usefulness of the available inventory at the end of the accounting period. We have to carry to the value only when the inventory is having some value. Otherwise we have to write down the inventory which is not available or even if available with no value.

Merchandise entry for write down shall be:

Debit : Merchandise cost/ Cost of goods sold

Credit : Closing inventory

Impact in the books

Assets	Liability	Equity
Will come down as we are not carrying any value to the balance sheet	No impact	Will come down as Equity includes retained earnings. As retained earnings will decrease because of charging to the profit and loss account resulting into reduction of retained earnings.

Expenses	Gross Margin	Net Income
Will increase because of charging to the profit and loss account.	Will decrease because of increase in expenses	Will decrease because of increase in expenses

Impact on Current Ratio: As the inventory value is coming down the numerator ie.Current Assets will come down, which will result into lowering of Current Ratio.

From the investor point of view, the net income will impact shall be on Equity holders and the impact need to be considered while evaluating the value of the share.