Let me try again but this time step it out through the relevant financial statements...
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
Column 7 |
1 |
|
Beginning |
Step 1 |
Step 2 |
Step 3 |
Step 4 |
End |
2 |
P&L[/B] |
|
|
|
|
|
|
3 |
Revenue |
|
|
|
|
40 |
40 |
4 |
COGS |
|
|
|
-60 |
-40 |
-100 |
5 |
Gross margin |
0 |
0 |
0 |
-60 |
0 |
-60 |
6 |
|
|
|
|
|
|
|
7 |
Balance sheet |
|
|
|
|
|
|
8 |
Cash |
100 |
100 |
|
|
40 |
40 |
9 |
Inventory |
|
100 |
100 |
40 |
|
|
10 |
Total assets |
100 |
200 |
100 |
40 |
40 |
40 |
11 |
Creditors |
|
100 |
|
|
|
|
12 |
Share capital |
100 |
100 |
100 |
100 |
100 |
100 |
13 |
Retained earnings |
|
|
|
-60 |
-60 |
-60 |
14 |
Liabilities + Equity |
100 |
200 |
100 |
40 |
40 |
40 |
15 |
|
|
|
|
|
|
|
16 |
Cash flow |
|
|
|
|
|
|
17 |
Customer receipts |
|
|
|
|
40 |
40 |
18 |
Payments to suppliers |
|
|
-100 |
|
|
-100 |
19 |
Net operating cash flow |
0 |
0 |
-100 |
0 |
40 |
-60 |
20 |
Cash at beginning |
100 |
100 |
100 |
|
|
100 |
21 |
Cash at end |
100 |
100 |
0 |
0 |
40 |
40 |
Beginning: You start business with $100 cash contributed through share capital
Step 1: You buy $100 inventory on credit
Step 2: You pay the stock supplier for the inventory before you have managed to sell the stock
Step 3: You write the stock down to $40 (reflecting your thoughts on its recoverable value)
Step 4: You sell the stock for its impaired value of $40
End: You have $40 of the invested $100 cash left.
Should be pretty evident from this that the impairment charge at step 3 (non-cash at time it was posted to the P&L and balance sheet) reflects an over-payment for stock bought on credit (at Step 1) and this bears out happening (in Step 4). The impairment charge reflects the loss of cash from buying and selling this item of stock.
Step me through your position this way and see if you agree the impairment does, in effect, reflect a waste of cash by management through poor inventory purchasing at Step 1.