What is the impact on Abercrombie & Fitch’s financial statements from the write-down of its logo-adorned merchandise inventory?

Older logo-adorned shirt on the left; new subtle logo shirt on the right

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 “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.

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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