Explanation
When a company performs an inventory write-down:
- Inventory value decreases (reducing total assets)
- Cost of goods sold (COGS) increases (since the write-down is typically recorded as an expense)
Let's analyze each ratio:
A. Current Ratio
- Formula: Current Assets / Current Liabilities
- Inventory write-down reduces current assets (inventory is a current asset)
- With lower current assets, the current ratio decreases, not increases
B. Total Asset Turnover Ratio
- Formula: Revenue / Average Total Assets
- Inventory write-down reduces total assets (denominator decreases)
- Revenue typically remains unchanged
- When denominator decreases while numerator stays constant, the ratio increases
- This is the correct answer
C. Receivables Turnover Ratio
- Formula: Revenue / Average Accounts Receivable
- Inventory write-down does not directly affect accounts receivable
- This ratio would likely remain unchanged
Key Insight: The total asset turnover ratio increases because the write-down reduces total assets while revenue remains the same, making the company appear more efficient in using its assets to generate sales.
Additional Note: While COGS increases from the write-down, this affects gross profit margin and net income, but not the total asset turnover ratio directly since COGS is not in that ratio's formula.
