The effects of writedown includes
- Decrease both current and total assets (CA)
- CA = quantity * unit cost, unit cost decreased → CA decreased
- Current ratio (CA/CL) decrease
- CA decreased, CL is the same
- Quick ratio is unaffected
- Quick ratios is based on cash equivalent components, not relating to inventory
- Inventory turnover increase, decrease
- days’ inventory on hand
- Cash conversion cycle
- Decreased total asset → increase total asset turnover → increase debt-to-asset ratio
- Equity decreased → debt-to-equity ratio increased
- Equity = Asset – liability, Liability = constant → equity decrease
- COGS = beginning inventory + purchase – ending inventory
- Value of ending inventory reduced, Purchase and Beginning inventory is fixed
- COGS raised
- Gross margin, operating margin net margin reduced
- Percentage of decrease in net income > percentage of decrease in assets → ROA and ROE are decreased.
Notes:
- Inventory turn-over
- Total asset turn-onver
