Recently, Abercrombie & Fitch (NYSE: ANF) has been implementing a turnaround strategy since its sales had been falling for the past few years (11% decrease in 2014, 8% in 2015, and just 3% in 2016.) One part of Abercrombie's new strategy has been to abandon its logo-adorned merchandise, replacing it with a subtler look. Abercrombie wrote down $20.6 million of inventory, including logo-adorned merchandise, during the year ending January 30, 2016. Some of this inventory dated back to late 2013. The write-down was net of the amount it would be able to recover selling the inventory at a discount. The write down is significant; Abercrombie's reported net income after this write down was $35.6 million. Interestingly, Abercrombie excluded the inventory write down from its non-GAAP income measures presented to investors; GAAP earnings were also included in the same report. Questions 1. What does the "write-down" mean? 2. What journal entry would Abercrombie & Fitch have made to write down its merchandise inventory during the year ended January 30, 2016? 3. What impact would the write-down of inventory have had on Abercrombie's assets? Liabilities? Equity? 4. What impact would the write-down of inventory have had on Abercrombie's expenses? Gross margin? Net income? 5. What impact, if any, would the write-down of inventory have had on Abercrombie's current ratio? 6. From an investor standpoint, do you think that the effect of the inventory write-down should be considered when evaluating Abercrombie & Fitch? Explain. Cost per Unit $20 # of Units Dec. 1 - Beginning 100 Inventory Dec. 5 - Purchase Dec. 9 - Sale 80 Dec. 11 - Purchase 50 Dec. 15 - Purchase 60 30 $22 $24 $25 Dec. 18 - Sale 50 Dec. 23 - Purchase 40 Dec. 30 - Sale 70 $28 Recently, Abercrombie & Fitch (NYSE: ANF) has been implementing a turnaround strategy since its sales had been falling for the past few years (11% decrease in 2014, 8% in 2015, and just 3% in 2016.) One part of Abercrombie's new strategy has been to abandon its logo-adorned merchandise, replacing it with a subtler look. Abercrombie wrote down $20.6 million of inventory, including logo-adorned merchandise, during the year ending January 30, 2016. Some of this inventory dated back to late 2013. The write-down was net of the amount it would be able to recover selling the inventory at a discount. The write down is significant; Abercrombie's reported net income after this write down was $35.6 million. Interestingly, Abercrombie excluded the inventory write down from its non-GAAP income measures presented to investors; GAAP earnings were also included in the same report. Questions 1. What does the "write-down" mean? 2. What journal entry would Abercrombie & Fitch have made to write down its merchandise inventory during the year ended January 30, 2016? 3. What impact would the write-down of inventory have had on Abercrombie's assets? Liabilities? Equity? 4. What impact would the write-down of inventory have had on Abercrombie's expenses? Gross margin? Net income? 5. What impact, if any, would the write-down of inventory have had on Abercrombie's current ratio? 6. From an investor standpoint, do you think that the effect of the inventory write-down should be considered when evaluating Abercrombie & Fitch? Explain. Cost per Unit $20 # of Units Dec. 1 - Beginning 100 Inventory Dec. 5 - Purchase Dec. 9 - Sale 80 Dec. 11 - Purchase 50 Dec. 15 - Purchase 60 30 $22 $24 $25 Dec. 18 - Sale 50 Dec. 23 - Purchase 40 Dec. 30 - Sale 70 $28
