Inventory with a value of $420 000 was written down to $250 000 in June 2019 because of falling prices in the industry. This transaction will:
A) decrease assets, profit and shareholders' equity.
B) decrease assets and profit, but not shareholders' equity.
C) decrease assets and shareholders' equity but not profit.
D) None of the above

Question

Quizplus · Accepted Answer

Writing down inventory from $420,000 to $250,000 decreases the value of assets (inventory is an asset). This reduction in inventory value is also recognized as a loss in the income statement, which decreases profit. Since profit contributes to shareholders' equity (through retained earnings), a decrease in profit also decreases shareholders' equity.

Inventory with a Value of $420 000 Was Written Down