Situation

Diversified Inc. is a retailer that sells a variety of goods under three major business units. Its Food Products Division delivers wholesale food products to national grocery store chains. Its Home Appliances Division manufactures and sells home kitchen appliances such as refrigerators, microwave ovens, and dishwashers. Finally, its High Fashion Division is a recognized leader in high-end womens clothing. During his annual review of the companys financial condition, Diversifieds president noted that the companys inventory included a material reduction described as an allowance to reduce inventory to market. While the Home Appliances Division had received a considerable amount of negative publicity relating to fires caused by defective switches in its products, the president felt that any reduction in the market value of these products that was taken in the third quarter was more than offset by the high margins in the High Fashion Division. Therefore, the president felt that no write-down should have been taken. Further, the president noted that the company had replaced the faulty switches in the third fiscal quarter and subsequent sales had shown that the market value of its appliances had partially recovered. All estimates are that the value of the appliance inventory should be completely recovered by the fourth quarter of the next fiscal year.

Directions

Research the related generally accepted accounting principles and prepare a short memo that addresses the presidents concerns. Cite your references and applicable paragraph numbers.