Answer: expense on the income statement.

## Explanation When inventory declines in value below its carrying amount on the balance sheet, this is known as inventory impairment or inventory write-down. According to accounting standards (IFRS and US GAAP): 1. **Lower of Cost or Market/Net Realizable Value Principle**: Inventory must be carried at the lower of cost or market value (US GAAP) or lower of cost and net realizable value (IFRS). 2. **Recognition of Loss**: When inventory value declines below its carrying amount, the carrying amount must be written down to its market value or net realizable value. 3. **Income Statement Impact**: The reduction in value is recognized as an **expense on the income statement**. This expense is typically called: - Cost of goods sold (if the inventory is sold) - Inventory write-down expense - Loss on inventory impairment 4. **Why Not Other Options**: - **Option B (decrease in the revaluation surplus account)**: This applies to revalued assets under IFRS, not inventory. Inventory is not typically revalued above cost. - **Option C (decrease in the inventory valuation allowance account)**: While some companies use allowance accounts for inventory obsolescence, the expense still flows through the income statement. The direct write-down method is more common for inventory impairment. **Accounting Entry**: ``` Dr. Inventory Write-down Expense (Income Statement) Cr. Inventory (Balance Sheet) ``` This reduces both the inventory asset on the balance sheet and recognizes the loss in the income statement, which decreases net income.

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