Question

Questions 1. What does "write-down" mean? 2. What journal entry would Abercrombie & Fitch have made to write down its merchandise inventory during the year ended January 30, 2016? 3. What impact would the write-down of inventory have had on Abercrombie's assets? Liabilities? Equity? 4. What impact would the write-down of inventory have had on Abercrombie's expenses? Gross margin? Net income? 5. What impact, if any, would the write-down of inventory have had on Abercrombie's current ratio? 6. 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

1. 'write down' is a process that shows an assets value have decreased when the market value of the asset dropes below the assets book value shown on the balance sheet.write down is completely different from write off .write off means the assets value is reduced to zero .

2.journal entry to record mechandise inventory write down :

	debit	credit
inventory write down	(amount)
inventory		(amount)

3. writing down inventory would reduce Abercrombie's total assets as inventory is treated as an asset on the balance sheet .writing down inventory reduces the equity as writing down inventory is treated as an expense in the income statement and it reduces the net income and the retained earnings of the company.writing down inventory does not directly impact the liabilities eventhough,while comparing with assets ,liabilities may show a higher amount as the assets value have decreased now.

4.writing down inventory increases Abercrombie's expenses as writing down inventory is shown as an expense in the income statement and so it reduces the net income of the company .as inventory write down is not charged on the cost of goods sold, it does not affect the gross margin of the company .

5. Abercrombie's current ratio(current assets /currrent liabilities) would fall as the inventory ( a current asset ) have reduced in its value .

6.Yes . from an investor standpoint the effect of the inventory write down should be considered when evaluating  Abercrombie & Fitch . because writing down the inventory would reduce companys net income and the retained earnings .it is a reduction in the company's equity . so the profit attributable to its investors would reduce  as the retained earnings of the company is decreased.company's assets value have also decreased.as an investor I would like to know why the company's equity have reduced .as an invetsor ,while evaluating Abercrombie & Fitch , I would like to know the reasons behind the writing down of inventory as it affects my earnings and as I have a right/responsibility to evaluate the company's financial performance in which i have invested or intented to invest .