During fiscal 2007 and 2008 RONA reported inventory writedowns. What is a writedown and why was it necessary for RONA to write down some of its inventory? What was the amount of the writedowns? Where is it reflected in the income statement?

What impact does it have on RONA’s cash flow? Explain. What impact did the writedown have on gross margin for fiscal 2008? What journal entry would RONA have made in 2008 to record the writedown? Do you think inventory writedowns are a major problem in a business like RONA’s? Explain.

RONA Inc. (RONA) is the largest distributor and retailer of hardware, home renovation, and gardening products in Canada. It operates a network of over 680 corporate, franchise, and affiliate stores of various sizes and formats. With over 27,000 RONA employees across Canada, the store network generates over $6.3 billion in annual retail sales. RONA’s mission is to offer the best service and the right product at the right price to North American consumers of housing and home improvement products. RONA is listed on the TSX under the symbol RON.’
RONA’s consolidated balance sheets and statements of earnings and cash flows, along with extracts from the notes to the financial statements and extracts from management’s discussion and analysis, are provided in Exhibit 7.3.

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EXHIBIT 7.3 RONA Inc.: Extracts from Financial Statements CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets December 28, 2008 and December 30, 2007 On thousands of dollars) Assets Current assets Cash Accounts receivable (Note 9) Income taxes receivable Inventory (Note 4) Prepaid expenses Derivative financial instruments (Note 21) Future income taxes (Note 6 Investments (Note 10 Fixed assets (Note 11) Fixed assets held for sale (Note 12) Goodwill Trademarks (Note 13) Other assets (Note 14) Future income taxes (Note 6) Liabilities Current liabilities Bank loans (Note 15) Accounts payable and accrued liabilities Derivative financial instruments (Note 21) Future income taxes (Note 6) Instalments on long-term debt (Note 16) 2008 2007 $ 12,345 $ 2,866 234,027 237,043 5,684 6,046 763,239 33,104 1,089 13,800 1,063,650 10,186 875,634 34,870 454,889 3,797 856,326 24,249 1,168 12,279 1,139,615 11,901 816,919 454,882 4.145 32,349 38,466 24,681 22,635 $2,506,173 $2,482,446 $ 8,468 422,318 2,180 4,854 15,696 $ 19,574 421,446 1,067 3,650 34,239