Write down of inventory to NRV impact on COGS?

CFA Level I FRA
#1

Hello all,

Why would a write down of inventory to NRV increase your COGS? Or really have any impact on your cost of sales? This is inventory on hand so I would think writing down the value of your inventory would reduce the cost of goods sold in the future?

Appreciate any help.

#2

You could get at this in a couple of ways.

You could just refer to the formula: COGS is Beginning Inventory + Purchases - Ending Inventory. If EI is lower (as it will be after a writedown), COGS becomes greater.

or alternately, you could view COGS intuitively as the cost of inventory “consumed” during the period. A writedown is (effectively) a loss in value in the inventory. So, it makes sense to allocate that loss against consumption of current period inventory.

#3

Could not have asked for a better explaination, that makes complete sense. Appreciate it!

#4

Glad it helped.