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?

Question

Quizplus · Accepted Answer

The cost of sales for the following year will reflect the written-down value of $10.00, not the original $15.00. This means the cost of sales will be lower, and the income for the following year will actually be overstated, not understated. Choices A, B, and C are true because writing down the inventory to $10.00 understates the current year's income and closing inventory, and also leads to an understated cost of sales if considering the original purchase price.

An Item of Inventory Purchased This Period for $15