why does an inventory write-down increase cost of sales? I thought we just record the write-down in losses?
COGS is an expense account related to inventories. Write-down of inventories (because of mismanagement or because inventories have gone obsolete) is an expense on the income statement. It gets allocated to COGS. Essentially you are getting rid inventories (hypothetically, to adjust the book value) similar to a sale without generating any revenues in this case. So the sale means you have to recognize COGS.
Yea Inginla is spot on with the coment “similar to sale without generating revenue.” I’m a numbers guys, so I think of it in this formula Inventory_BOY + Additional Inventory _____________________________ = Goods Available for Sale - (Inventory_EOY - write down of inventory) ______________________________ = COGS The double negative to the writedown is essentially increasing your COGS.
Thanks you guys, i understand your points. But do we need to record a ‘loss’ at the same time? I guess if we already adjusted for COGS, we don’t need to do that. OR it is ‘impairment’ that we need to record a loss??
I’m not sure on it, but I think if the amount is small, the adjustment to COGS is enough. For a major write-down, you would use a separate line the the income statement for inventory write-down expense. If I have time to research more, i"ll get back–I see your point.
COGS is the cost of the goods that have been sold to your customers plus all other expenses that it took to get your items into inventory for sale. This is why if it is just a small write down, you would include it in COGS and if it is a larger write down you would include it in a line item. If it’s a small amount you would reduce Inventory as an asset by the amount on the balance sheet and increase COGS by the same amount in the income statement. For a large amount you would do the same thing on the balance sheet but add an extra line item in the income statement.
cool, thanks all !!