From time to time, any manufacturing or retail company identifies inventory that it cannot sell for an extended period of time due to the absence of value. Inventory management accounting traditionally facilitates the company’s control over inventory (Verma 55). When a large amount of products is collected in the warehouse, it should be identified as obsolete inventory (Verma 55). In general, obsolete or damaged inventory is traditionally written off or marked to ensure that its cost is lowered.
It goes without saying that the timing of the obsolete or damaged inventory’s write-off directly depends on the organization’s age and the existence of disruptive technological shifts in the method of production and products (Dyckman et al. 385). In other words, a new company or a company with recent investments in new facilities will definitely have less obsolete inventory in comparison with old companies that have nearly ended productive resources. The shareholder value may have an impact on the timely write-off of inventory and cause its deferral as this procedure inevitably affects inventory turnover and reduces the organization’s net income and the owner’s equity. However, the timing of the obsolete inventory’s write-off may be substantively influenced by the manager’s ethical practices. Ethics deals with the propriety, moral quality, or fitness of an acting course that may benefit or injure people (Dyckman et al. 631). The use of obsolete inventory in the products’ new nostalgia line may be regarded as a considerably controversial practice. However, for example, a store may decide to defer or postpone the write-off of spoilt fruits and vegetables and offer them a considerable discount.
It goes without saying that inventory management plays an immeasurably significant role in the performance of most manufacturing and retail businesses. In the income statement, its cost and the related cost of goods sold represent the expenses’ largest source (Dyckman et al. 327). However, timely and accurate information concerning the cost of goods sold and inventory may be regarded as highly critical for the interpretation of the financial statements and the effective management of operations and resources (Dyckman et al. 328). As a matter of fact, if inventory declines in its value below the original cost for any reason, it should be written down in order to reflect the loss (Dyckman et al. 337). The organization’s management should compare the inventory’s actual value and its original value when it was initially purchased to define the difference. In the income statement, the write-down of inventory is traditionally reflected as an expense that reduced income, gross profit, and equity of the current period.
Despite the fact that the investigation of damaged or obsolete inventory may be initiated effortlessly, managers frequently defer the inventory’s write-down. In general, the timing of such write-down, especially during the period of poor business performance of management turnover, demonstrates the attempts to maneuver a substantial increase in following earning. It general, the inventory’s write-down may shift the organization’s income from one period to another (Dyckman et al. 338). For instance, when a company writes down inventory below its actual replacement cost, gross profit will be increased in the future as lower costs will be reflected in cost of goods sold. The deferral of the inventory’s write-down may be connected with the management’s efforts to improve the perceptions of investors concerning the company’s financial performance in the future. Moreover, the deferral of depreciation may occur for tax purposes as a prevalent number of companies use depreciation for tax returns.
Works Cited
Dyckman, Thomas R., et al. Financial & Managerial Accounting for Decision Makers. 3rd ed., Cambridge Business Publishers, 2018.
Verma, Meenu. “Inventory Management Accounting for Obsolete Inventory.” IUP Journal of Accounting Research & Audit Practices, vol. 14, no. 1, 2015, pp. 55-60.