This one is a real puzzler for me. We have a company called “Rolby,” which reports under IFRS and values its inventory FIFO. If I understand right, the effective tax rate is 30%, and for the calendar year 2009 the following apply, amounts in US$ millions:
Beginning inventory: gross 602, valuation allowance 15, net 587.
Ending inventory: gross 620, valuation allowance 25, net 595.
Revenues 5442, COGS 3782, Net income 327.
COGS includes charges for inventory write-downs in the amount of 15, and a note, “This does not match the change in inventory valuation allowance because the valuation allowance is reduced to reflect the valuation allowance attached to items sold and increased for additional necessary write-downs.”
We are asked to calculate an adjusted net profit ratio, (it is already FIFO,) assuming no recognition of valuation allowance for inventory.
My approach to this problem is to ignore the total amount of inventory write-downs, and only consider the net change in inventory valuation allowance from beginning to end of the accounting period. My justification is that when goods are deemed impaired, it really makes no difference to net income whether they are written down in inventory or simply sold at a loss, and thus only the net change in total inventory valuation allowance is significant, since I’m assuming that it is the same goods sold for the same price, whether or not the allowance is recognized, so (gross) revenues will be the same in either case, and thus only a net change in inventory valuation allowance can make any difference in net profit.
But this does not lead me to the correct answer. Why?