Inventory writedowns

Hello all,

I have a question regarding a CFAI problem. It is as follows:

Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the results the company would have reported if the write-down had never occurred, Zimt’s reported 2008:

a.) Profit was overstated

b.) Cash flow from operations was overstated

c.) Year-end inventory balance was overstated

To be honest, I’m not sure I understand the exact question posed. I’m pretty well versed in the effects of inventory writedowns, but the wording of the question seems quite confusing to me. Can anyone shed some light on this?

Thanks!

If the inventory had been reported on the books - the company would have had a loss

so by writing down the inventory in 2007 and then reversing the writedown - profits are overstated?

Since Zimt reversed the write down in 2008 ,its cost of sales is reduced by the amount of reversal.Thus,its reported profit in 2008 is overstated compared to the results the company would have reported if the write-down had never occurred.

The easiest way to see this is to put in some numbers.

The same is true for virtually all FRA questions.