Sept.December 2019. Past paper FR

Hi, If we were to sell the inventory at $1.5 million and this is based on a cost structure of 20% gross profit margin then the cost would be 80% of the selling price, i.e. $1.2 million. The inventory will have been valued at the lower of cost and NRV, therefore it will have been recorded at $1.2 million. We're then told that they are going to discount it to half of its cost. This therefore reduces the inventory by $0.6 million (50% x $1.2 million) to its new value of $0.6 million. We therefore need to reduce the inventory by this amount on the SFP and reduce profits by the same amount. To reduce the profits we would increase the cost of goods sold. Hope that clears it up a bit. Thanks