Financial Modeling

Re: Inventory Writedown

Assuming you want to recognize the Inventory Writedown in Year 1 of the projection model: 1) Insert a new line on IS below COGS and call it Inventory writedown of $100 (or whatever amount). Inventory writedowns usually flow thru COGS however, since COGS is a driver of Inventory on the BS, you want ... Assuming you want to recognize the Inventory Writedown in Year 1 of the projection model:

1) Insert a new line on IS below COGS and call it Inventory writedown of $100 (or whatever amount). Inventory writedowns usually flow thru COGS however, since COGS is a driver of Inventory on the BS, you want to keep this extra (one-time) item distinct from COGS. Now, NI should be lower by $100 * (1-T). If you want to report Pro Forma IS figures, you would undo this, but still need the numbers to flow through for the writedown.

2) Inventory down by $100 => this change on an integrated model won't cause an imbalance b/c Working Capital picks up change in Inventory and adjusts cash balance lower by $100; however this is incorrect b/c cash shouldn't change due to inventory writedowns.

3) CFO: add a new line in the non-cash section, under D&A, above working capital items:
Non-Cash inventory Writedown: increase by $100 => this is to adjust for the fact that the $100 of new expense that flows thru IS and RE is a non-cash expense; this causes BS to not balance (correctly so)

4) CFO: increase/decrease in Inventory in working capital
subtract change in inventory by $100 => this is required because your inventory balance on the BS is now $100 less than if you had no writedowns. As such, your change in inventory on CFO is now understated by $100. i.e. if last year INV was $1,000 and this year, it's $2,000, that's a $1K reduction of Cash. But a writedown of Inventory makes this year's new INV balance $1,900 and on CFO, it shows $900 change. But the change really was $1,000 and cash still went down by $1,000 not the new $900. So, make sure the correct change in INV is reflected by subtracting the $100 writedown, so that the $900 change goes back to $1,000 change

Notice, that as a net effect, cash went up by $100 * T because you had a tax savings of that amount since the inventory writedown is tax deductible. If you were doing this on a Pro Forma Adjustments column (i.e. in a stock raise or M&A/LBO), then you would flow this $100 * T through increase in DTA and resulting tax schedule. This wasn't required here because we did this on Year 1 projection and thus "used up" the DTA right away. So in theory, the second the inventory writedown occurs, the correct entries would be:
COGS up $100
RE up $100 * (1-T)
DTA up $100 * T

when the DTA due to this specific inventory writedown is used up:
DTA down $100 * T
Cash up $100 * T
and thus, still makes sense from an accounting debits/credits perspective as to why Cash goes up by $100 * T in our set of entries.

Happy modeling! Read More

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by WST Expert 1.

added 11 years ago

Re: Inventory Writedown

THANK YOU SO MUCH!!! WST IS A LIFE SAVER!!!

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by Guest 1.

added 11 years ago

Re: Inventory Writedown

I have one more question in regards to this. I have a balanced model right now, however when I put in 100 of writedowns on my I/S, my inventories do not fall by 100. I followed the steps to perform on the IS and CF but am a bit unsure about the B/S. Currently before any inventory writedown featur... Read More

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by Guest 1.

added 11 years ago

Re: Inventory Writedown

You'd have to "manually" push the $100 writedown thru to the Inventory balance on the BS. We usually set this up with an extra line item at the bottom of the BS drivers that says Inventory writedown and have the calculated Inventory amount on top then subtract that amount. It truly is easi... Read More

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by WST Expert 1.

added 11 years ago

Re: Inventory Writedown

ah thank you for the confirmation. I manually adjusted the formula in Inventory to capture it. Thank you very much!

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by Guest 1.

added 11 years ago

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