At the end of the Year 2 accounting period, DeYoung Company determined that the market value of its inventory was $79,800. The historical cost of this inventory was $81,400. DeFazio uses the perpetual inventory method. Assuming the amount is immaterial, how will the necessary write-down to reduce the inventory to the lower-of-cost-or-market affect the company's financial statements?

Question

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The necessary write-down to reduce the inventory to the lower-of-cost-or-market will decrease the value of the inventory on the balance sheet, which will decrease total assets. This will also decrease gross margin as the cost of goods sold will increase by the amount of the write-down. Additionally, net income will be decreased as a result of the lower gross margin.

At the End of the Year 2 Accounting Period, DeYoung