The following is a question on the Schweser QBank:
“The most likely effect of a write-down of inventory to net realizable value on a firm’s quick ratio is?”
The correct answer is “no change”.
Wouldn’t an inventory write-down lead to a decrease in EBIT through higher COGS? Therefore, leading to a reduction in taxes paid by (write-down)(1 - tax rate). Wouldn’t this increase cash and the numerator of the current ratio?
Probably not.
An inventory write-down is an unrealized loss. Most tax authorities don’t let you deduct unrealized losses (nor do they require that you add unrealized gains); they wait for the loss (or gain) to be realized through a (sales) transaction.
I think I figured it out. The question doesn’t explicitly state that the write down should be translated into higher COGS. I think it should get credited to the contra asset (bad inventory estimate) which is already baked into COGS.
Either way, it’s going to reduce net income, but not tax liability.
The Wiley question, as you stated, is effect on quick ratio, which inventory is not relevant.
That is why there is no effect on quick ratio (Cash+MS+AR/CL).
It has nothing to do with the write-down loss reported on P/L.