Inventories - Practice Problem #13

[ofthedivision17]

Hello All,
I stared at this one for 20 minutes this morning: FRA > Reading 29 - Inventories > Page 394 > #13
“Zint AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the results the company would have reported if the write-down had never occured, Zimt’s reported 2008:”
A) profit was overstated.
The book’s explanation did not register with me. Can someone with a better accounting background break it down?
Thanks in advance for your input.

 

[Wojtek]

Ok, think about the income statement consequences of the initial write-down (2007) and its subsequent reversal (2008):
Write-down: income statement charge, i.e. additional expense/loss in 2007
Write-down reversal: the reverse of the above, i.e. additional income in 2008
Reversing a write-down is a bit like saying, hey, with the benefit of hindsight, we didn’t really need to take the income statement hit back in 2007, so we are going to undo/offset its effect by reporting additional income in 2008. In that sense, the 2008 results are overstated (if it had not been for the initila write-down and the subsequent need to reverse it), the 2008 results would have been lower.
Hope this helps

 

[ofthedivision17]

That was tremendously helpful. Thank you for sharing your expertise.