Artificial Diamonds and Impact of Loss in Inventory

Sunday, October 17, 2010 Posted by RuninDC
Neida makes and sells diamond earrings.  Cost and market price largely determined by the price of diamonds.   Artificial diamonds have really improved especially in China.  Sometimes, detection can be challenging.

Neida is concerned that these earrings will undercut her sales.   But then she says "As long as I don't sell any of the diamonds that I purchased at the old, higher price, I won't make a loss."


In this figure, Neida's old diamonds are part of the beginning inventory.  So, she already took a loss on the diamonds.  

Is this statement true?

Answer:  No, Neida incurred a loss on the diamonds in the inventory when the market price for diamonds dropped.  The current value of old and new diamonds is same and it does not matter which one she sells.
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