"You are an analyst specialising in the jewellery retail industry. From your experience, the lowest feasible level of inventory turnover for a jewellery retailer is 1.1 times p.a. If inventory turnover, using the inventory balance reported by management, is lower than this threshold, you believe that inventory should be written down accordingly. (Inventory turnover = COGS / Inventory.)
Victoria Ltd is a jewellery retailer that you are analysing. In its financial statements for the year ended 30 June, 2015, the book value of inventory was AUD1.52 million. COGS for the year was AUD1.22 million.
Required
Calculate inventory turnover, using the financial statements prepared by management.
Calculate the revised value of inventory, for use in your analysis.
Record the journal entries to "undo" this accounting distortion.