As a newly hired staff accountant for Jordan Designs, you have been asked to conduct the year-end physical inventory. During the process, you observe that much of the inventory is outdated and there fore could not be sold for the recorded cost. You recommend to your manager that the inventory be written down, based upon the lower-of-cost-or-market principle. However the manager informs you that you should leave the inventory value at the cost value. She insists that the company frequently experiences inventory value changes and that the inventory will be marketable again in the future. Until that time, the company plans to leave the merchandise in its warehouse.

Why would the manager want to keep the inventory at its current cost?

Who is affected by the decision to, or not to, write the inventory down to its market value?

What things should you consider when evaluation whether you should recommend and inventory write-down to your manager's boss?

To understand why the manager wants to keep the inventory at its current cost, we can consider several potential reasons:

1. Reporting consistency: The company might prefer to maintain consistency in reporting and financial statements by valuing inventory at its original cost. This approach avoids frequent changes in inventory values, which could complicate financial analysis and comparisons.

2. Future marketability: The manager believes that the outdated inventory will become marketable again in the future. If they anticipate a potential increase in demand or a change in market conditions, they may be reluctant to write down the inventory immediately.

3. Potential recovery: By leaving the inventory at its cost value, the company retains the option to potentially recover a higher value for the products in the future. This approach relies on the assumption that the market price will rise, allowing the company to sell the inventory at a more favorable price than its current market value.

The decision to, or not to, write the inventory down to its market value can affect different parties:

1. External stakeholders: Investors, creditors, and other external parties who rely on accurate financial information may be affected by the decision. If the inventory is not properly valued, the financial statements may misrepresent the true financial position or operating results of the company.

2. Internal management: The decision can impact internal decision-making processes, such as determining profitability, setting pricing strategies, assessing inventory management practices, and evaluating the need for production adjustments or changes in product lines.

3. Staff accountant: As the staff accountant responsible for conducting the year-end physical inventory, your professional judgment and integrity may come into question if the decision to leave the inventory at cost goes against generally accepted accounting principles (GAAP) or best practices.

When evaluating whether to recommend an inventory write-down to your manager's boss, consider the following factors:

1. GAAP compliance: Ensure that the inventory valuation aligns with relevant accounting principles and industry standards. If the lower-of-cost-or-market principle is recognized as appropriate, the inventory should be written down to its market value.

2. Materiality: Assess the significance of the outdated inventory's value in relation to the overall financial position of the company. If the inventory represents a substantial portion of the company's assets, a write-down may be necessary to accurately reflect the financial performance.

3. Risks and future marketability: Evaluate the manager's claims regarding the future marketability of the inventory. Consider the likelihood and timing of potential sales and whether any market trend or condition supports these assertions.

4. Management's authority: Acknowledge that management has the discretion to make decisions related to inventory valuation. However, ensure that the decision aligns with the company's reputation, ethical standards, and the potential impact on stakeholders.

Ultimately, it is crucial to consult professional guidelines, such as GAAP, and consider the best interests of the company and its stakeholders when evaluating whether a recommendation for an inventory write-down is appropriate.