CFA Level I · CFA Level I Exam · Analysis of Inventories
Under IFRS, a retailer writes inventory down to net realisable value in the current year. Compared with no write-down, the retailer's current-year gross margin and next-year inventory turnover are most likely:
Gross margin is most likely lower and turnover higher. The write-down is expensed through cost of sales, reducing gross margin, while the smaller carrying amount of inventory reduces the denominator of the turnover ratio, raising turnover.
- Ahigher gross margin and higher turnover
- Blower gross margin and higher turnoverCorrect
- Clower gross margin and lower turnover
Explanation
The write-down is usually recognised in cost of sales, which lowers current gross margin. It also reduces carrying amount, so average inventory is lower, and turnover (cost of sales divided by average inventory) is higher, other things equal.
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