In reading 21 example 5, when asked to assume “no inventory write-downs” only the change in valuation allowances is deducted from COGS (question 2) (not total charge 1229). This sounds like “inventory write-downs” means the change in valuation allowance during the year. However, in practice problem 7 in calculating inventory-turnover ratio assuming “no valuation allowance”, total charge to COGS ($13) is added back. Can any one explain why total charge ($13) is deducted, not the change in valuation allowance ($3) in calculating adjusted inventory values, please.
Both of these are changes in the valuation allowance. While example 5 does not show the changes, you have to solve for that, practice problem 7 is shown on the Income Statement as a change in valuation allowance. I assume this because the footnote states: “Charges included in COGS for inventory write-downs” is 13. COGS will always be changes, since it deals with the current period, inventory stuff will usually be cumulative. This is the difference between COGS in LIFO / Retained Earnings and Ending Inventory in LIFO (one uses changes in LIFO reserve, the other the actual LIFO reserve to adjust to FIFO).
@starbuk I assume this because the footnote states: “Charges included in COGS for inventory write-downs” is 13. If this is the reason the charges included in COGS as inventory write-downs in the question 5 , 1229, should be adjusted, not 685 (here they have adjusted only change in the allowance). But in q 7 total charge to COGS (13) has been adjusted. Any thoughts?
The 13 charge is already adjusted to reflect the change in valuation allowance, since they are pulling the number out of COGS. The other number for valuation allowance was calculated from the actual valuation allowance figures, and so you have calculate the change. Again, the $13 is NOT the total charge, it is the change. We know this because they pull the number out of COGS.
on p. 44 in exhibit 1, the valuation allowance for 2008 and 2009 respectively are 23 and 20. Thus the change in valuation allowances is -3 not 13. Isn’t it? Since we have 2008 and 2009 balances of valuation allowance, why don’t we use the same method as in example 5 in calculating the adjustment?
There is another asterisk in the footnotes which explains that the change in valuation allowance does not exactly match the figure used in the COGS because of some pricing issues. You should be using the figure in the COGS which is stated to be $13 instead of trying to solve for this number since it says in the footnotes that the numbers do not match because of price changes. My last comment here is that you need to use the change in valuation allowance to calculate the COGS adjusted, and they give you think change in the footnotes to the income statement. You do not have to solve for it. If you did have to solve for it, I am sure they would give you all the data you needed to get the right numbers. This is really a one time thing in the example problems, I would not spend so much time on it, but you should always read the footnotes especially if you are having discrepancies.
what is the title of this reading in CFAI text? I’m trying to find this example in the 2010 LII text. thanks
nevermind i found it one cfai’s site. this was originally a level I reading in 2009
It is in level 2 FRA reading 21. Any other one has different explanation on this?
That increase in the account has nothing to do with COGS, it is linked to bad debt expense. The only thing reflected in COGS is the change in the net allowance account. See here: http://ccba.jsu.edu/accounting/BADDEBTS.HTML If you have not studied accounting then this stuff is over your head. Just to recap: you should use the change in allowance account to get the adjustment to COGS (problem 5). But if you are given the adjustment to COGS (like you are in problem 7) then just use that number. There is no other explanation this is the way to do it.
It is by no mean relates to bad debts. Anyway thanks for your effort.