CFA CFA Level 1 Inventory and COGS relationship

Inventory and COGS relationship

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    • alanjiler
      Participant
        • CFA Level 1
        Up
        2
        ::

        Why when we say inventory decrease (write-down), the COGS will increase??

        I think in a way that when inventory wrtie-down, there will be less (value) of inventory, therefore cost of selling less value of inventory will be decreased (COGS decrease).

        Would anyone correct me on this? Thanks.

         

        Zee Tan voted up
      • KajalDighe
        Participant
          • CFA Level 1
          Up
          1
          Accepted answer
          ::

          Beginning inventory + Purchase – ending inventory = COGS
          Lets say its, 200+100-50= 250
          If inventory w/d happens i.e ending inventory decrease to for eg. 25
          It will be 200+100-25 = 275 i.e increase in COGS

          Let me know if makes sense.

          Zee Tan voted up
        • Zee Tan
          Keymaster
            • CFA Charterholder
            Up
            0
            ::

            A write-down of inventory isn’t just assuming they were never there, but rather taking the loss.

            One way to think of this is “selling your inventory at $0”, so your cost of written-off inventory becomes COGS.

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