On July 21, according to a
report by Fortune, Boeing announced a big accounting charge on some of its
inventories. Specifically, the company announced a total of $2 billion in
accounting charges related to the aircraft 787, 747, and the KC – 46, a tanker
aircraft.
A write down is a reduction
in the estimated value of an asset in a company’s inventory is recorded by
reducing the amount reported as inventory. The way it is done in accounting
terms, is that since an inventory is an asset, and is on the left side of the
balance sheet, the asset account of inventory is reduced by a credit. The debit
in the entry to write down inventory is reported is reported in an account as
loss on write down of inventory, which appears on the income statement. Since
the write down amount of an inventory reduces net income, it will also reduce
the amount reported on owner’s equity.
A write down is an adjustment
to the stated value of an asset when its fair market value is below its
historical cost value. Even though it reduces net income as described above, it
is a paper loss, and it reduces a company’s tax liability by reducing taxable
income, and does not have any effects on cash flow.
Fortune is reporting that for
the 787, the total after tax charge is $848 million due to unsold aircraft. The
747 charge is $814 million after tax, due to a weak demand for air cargo
shipping. And for the KC – 46 tanker, the after tax charge amounts to $393
million due to software and delivery schedule problems.
Bill T. Alexandratos, MSc. BA
