“Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the result the company would have reported if the write-down had never occured, Zim’s reported 2018:
A. profit was overstated
B. cash flow from operations was overstated
C. year-end inventory balance was overstated”
Answer is A. It is not that clear to me though, follow through my rational and let me know if maybe I am thinking something wrong…
2017: Write-down decreases inventory value (say by 100), and increases COGS by 100
2018: Write-down reverse: inventory value goes up by 100, COGS decreases by 100.
Both the increase/decrease in Inventory and COGS would cancel out, no? Per the book, only the inventory movements are cancelled out, and thus the answer is A. Maybe I am understanding incorrectly.
If the write-down never happened, then wouldn’t Inventory / COGS remain the same in 2018?