Conservatism: losses are recognized as soon as they occur, not when items are sold.
Gross Margin, as reported on the income statement, is not distorted. The gross profit ratio is now comparable to other accounting periods and competitors.
Transparency: The income statement clearly shows where the gains and losses occur; and the reported net income is the same as if the inventory write-down had not been taUsing sales to date (at time of inventory loss), and standard gross profit ratio, calculate gross profits to date.
Determine cost of goods sold to date.
Determine cost of goods available for sale to date.
Determine inventory to date.
Determine the amount of inventory lost.
ken.