An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?
A) The cost of sales of the following year will be understated.
B) The current year's income is understated.
C) The closing inventory of the current year is understated.
D) Income of the following year will be understated.

Question

Quizplus · Accepted Answer

The cost of sales for the following year will reflect the written-down cost of $10.00 instead of the original $15.00, leading to an overstatement of income for that year, not an understatement. Choices A, B, and C correctly describe the impact of writing down the inventory: it understates the current year's income and closing inventory, and because the cost recorded is lower, it would understate the cost of sales if the item were valued at its original cost.

An Item of Inventory Purchased This Period for $15