In the K233 presentation, when a year-end impairment loss on inventory is shown separately as an expense, it reduces profit for the period and the carrying amount of inventory. Gross profit in that presentation is calculated using revenue and cost of sales. An error in cost of sales is a different issue and can change gross profit.
The 2027 SEC G2 Principles of Accounts syllabus covers cost of sales, inventory valuation and the presentation of impairment loss. Read the question carefully to see whether it describes the cost of goods sold, a write-down of unsold goods or an error that needs correcting.
- Identify whether the goods were sold or remain in inventory.
- Compare the cost and net realisable value of the stock under review.
- Record any impairment loss and update the inventory amount.
- Follow the required presentation when calculating each profit figure.
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Separate the sale from the year-end adjustment
Cost of sales records the cost attached to goods that were sold. A year-end impairment considers stock still held when its net realisable value is below its carrying cost. Keep the two amounts separate in your working so you can see where each enters the statement.
If the question gives an inventory amount that already includes the write-down, check the wording before making another adjustment. Deducting the same loss twice would reduce inventory too far.
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Worked example | Follow three figures
A fictional trader has sales revenue of $2,400 and cost of sales of $1,500. Closing inventory at cost is $360 and its net realisable value is $300. Assume a single batch and no other income, expenses or insurance claim.
Gross profit is $900. The inventory impairment is $60, so inventory is reported at $300. With the $60 shown separately as an expense and no other adjustments, profit for the period is $840. The entry debits impairment loss on inventory and credits inventory by $60.
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Check what the question has already accounted for
Label each amount on your working page. If the cost of sales figure needs its own correction, handle that before calculating gross profit. If a separate write-down is required, trace it into the expense and closing inventory without deducting it again from an already adjusted amount.
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CHAPTER 4 OF 4 · Back to contents
Frequently asked questions
Is the full $360 an expense in the example?
The adjustment is the $60 reduction from cost to net realisable value. The remaining $300 is the reported inventory value.
What if the net realisable value is higher than cost?
The lower-of-cost-and-net-realisable-value rule keeps the inventory at cost in that case.