Module I· Three-Statement Mechanics & LinkagesAdvanced
Question
Inventory write-down of 50 (write-down for obsolescence) — 3-statement impact at 30% taxes?
Answer
Mechanics
An inventory write-down of 50 at a 30% tax rate, treated as a non-cash impairment (the write-down typically lands in COGS or 'other operating expenses'):
Income statement
| Item | Δ |
|---|---|
| COGS | +50 |
| EBIT | −50 |
| Taxes (30% × 50) | −15 |
| Net income | −35 |
Cash flow
| Item | Δ |
|---|---|
| Net income | −35 |
| + Write-down (non-cash) | +50 |
| = OCF | +15 |
Balance sheet
| Account | Δ |
|---|---|
| Inventory | −50 |
| Cash | +15 |
| Retained earnings | −35 |
Sanity check
The change in assets (−50 + 15 = −35) equals the change in equity (retained earnings −35).
Deep diveShow more details
Key point
Same mechanism as in the D&A example (#619) — a non-cash impairment creates cash via the tax shield. The inventory reduction shows up either as a non-cash add-back OR as the WC line 'Δ inventory' in OCF — but not both, or you double-count.
Pitch tip
Inventory write-downs are a classic quality-of-earnings marker — repeated write-downs at a middle-market industrial signal either weak demand forecasting or aggressive prior-period accounting.