Answer: recognized as a reduction in cost of sales.

## Explanation Under IFRS (International Financial Reporting Standards), when the circumstances that previously caused inventory to be written down below cost no longer exist, the reversal of the write-down is **permitted**. According to IAS 2 (Inventories), the reversal should be recognized as a **reduction in cost of sales** in the period in which the reversal occurs. ### Key Points: 1. **IFRS allows reversal** of inventory write-downs when the net realizable value increases. 2. **Recognition**: The reversal is recognized as a reduction in cost of sales, which increases gross profit. 3. **Limitation**: The reversal cannot exceed the original write-down amount (cannot write inventory up above original cost). 4. **US GAAP difference**: Under US GAAP, reversal of inventory write-downs is **prohibited**. ### Why Option B is correct: - Under IFRS, the reversal reduces cost of sales, effectively increasing gross profit. - This treatment reflects the economic reality that the inventory's value has recovered. ### Why other options are incorrect: - **Option A**: Incorrect because IFRS permits reversal (though US GAAP prohibits it). - **Option C**: Incorrect because the reversal is not recognized as other operating income; it's recognized through cost of sales. ### Accounting Entry: ``` Dr. Inventory (to increase inventory value) Cr. Cost of Sales (to reduce expense) ``` This treatment ensures that the income statement reflects the recovery of inventory value in the period it occurs.

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