Inventory

“Inventory written off”? – where inventory has become old, damaged or obsolete its net realisable value may have fallen below cost

And we already know that inventory should be valued at the lower of cost and net realisable value

So we need to reduce the value of our inventory by the appropriate amount to write it down to its new re-calculated lower value

But it’s not a cash transaction – it’s a non-cash expense so needs to be added back into the profits to arrive at net cash flow from operating activities

“Grants received and grants amortised” – the receipt of a grant involves the double entry:

Dr Cash (say $1,000)
Cr Government Grant $1,000

So that clearly involves a flow of cash and will feature (probably) in the investing activities section (where the grant relates to an asset)

But the benefit of that grant should be spread over the same life span as the asset to which it relates (say 10 years) and therefore we need to amortise it over that same 10 year period at the rate of $100 each year

The double entry involved is:

Dr Government Grant $100
Cr (probably) Cost of Sales $100

It’s a bit like thinking about negative depreciation in that the amortisation of the grant reduces the affect of the depreciation

But it’s not a cash transaction – it’s a non-cash income so needs to be deducted from the profits to arrive at net cash flow from operating activities

Clear?