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Anyone can share how to come out a policy for provision for slow moving inventory and provision for doubtful debts?? Thank you!!

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Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Impairment of inventory is a Management Decision based on GAAP. Essentially, based on your sales cycle, old moving inventory value decreases over time, as does the potential sales price. When the sales price moves below the inventory at purchase price, you have an impairment.

Look at your inventory and take a credit to Allowance for Inventory Reserve and a debit for Reserve Inventory Expense for the amount appropriate to each inventory item at the date (month-end, quarter-end). Make sure the calculation is (units on hand * current cost) - (units on hand * reduction in current cost).

Ex. You sell widgets that aren't moving. You bought them at $5 and normally sold them for $10. Now you'll be luck to sell them at $4. In stock, you have 100 units. You're going to write down the inventory to $4.

(100 * $5) - (100 * $1) = $500 - $100 = $400. You'll have an allowance/expense of $100 and a Net inventory of $400.

If you sell above $4, you'll show a "profit" (or a reduced loss, depending on whether it happens the same fiscal year). If you sell for $3.75, you'll show an additional loss of 25 cents per unit.

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