Inventory
Compare the cost flow assumptions used to account for inventories
1. The following information is available for a company that uses a specific Consider the following inventory activity:
identification inventory system:
• October 1: Beginning inventory consisted of 200 units at a cost of $7.00
each. $1400
• October 7: 500 units were purchased at a cost of $8.00 each. 2000
• October 18: 250 units were sold from the October 7 purchase.
• October 22: 600 units were purchased at a cost of $8.50 each. 2125
• October 24: 300 units were purchased at a cost of $9.00 each.2700
• October 26: 350 units were sold from the October 22 purchase.
The 9 units of ending inventory are identified with the purchase of May 20.
What is the cost of goods sold (COGS) and the value of ending inventory for
October?
Using the specific identification method, what is the value of the ending
inventory and the cost of goods sold?
250x8=2000
a. $126 and $430, respectively.
350x8.50=2975 COGS=$4,975
b. $126 and $530, respectively.
Ending Inventory: $8,225
c. $126 and $544, respectively.
d. $56 and $474, respectively.
Determine the effects of inventory errors on the financial statements
2. A company that used the periodic inventory system overstated its beginning A company mistakenly understated ending inventory by $25,000 in a year
inventory but correctly stated its ending inventory. but verified the correct ending inventory was recorded in the following
year.
What will be the effect of this error on the financial statements at the end of the
period? What is the effect of this on the total net income for the two years
combined?
3. A company did not record the purchase of inventory and did not include this item A company uses a periodic inventory system. A $100 purchase is not
in the ending inventory balance. recorded in the purchase account for the year but is included in the ending
inventory count.
What is the effect of this on the financial statements?
What is the effect of this error on the company’s income statement?
4. A company uses a periodic inventory system. A $100 purchase is properly A company uses a periodic inventory system. A $100 purchase on account
recorded in the purchase account for the year but is excluded in the ending is inadvertently recorded in the purchase account as $200 for the year but
, inventory count. is correctly included in the ending inventory count as $100.
What is the effect of this error on the company’s financial statements? What is the effect of this error on the company’s financial statements?
5. A company uses a periodic inventory system. The company is holding $100 of A company uses a periodic inventory system. The company incorrectly
consigned goods and incorrectly includes them in its ending inventory count. The records inventory item purchases that were not received by the company’s
company discovered the error the following year and excludes the goods in its warehouse as of the last day of the most recent reporting period
inventory count for that year. (mistakenly including the goods in purchases AND in the ending inventory
count). The items were purchased under free on board (FOB) destination
What is the effect of this error on the company’s financial statements? terms. Therefore, they were not legally owned by the company on the
period ending date. The cost of the inventory purchased was $100,000.
The company balance sheet reports the following balances at the end of
the reporting period:
Current assets: $600,000
Current liabilities: $300,000
What are two effects of the error on the company’s balance sheet?
a. retained earnings are overstated.
b. net working capital is understated.
c. the current ratio is understated.
d. total purchases are overstated.
6. A company uses the periodic inventory costing system. The company includes A company uses the periodic inventory costing system and has a calendar
goods shipped to them f.o.b. shipping point in purchases but not ending year-end. The company starts the year with a beginning inventory that is
inventory. understated. There are no other errors in the year.
What is the effect on the current ratio? What is the effect of this inventory error on the company’s net income for
a. no effect. the calendar year?
b. understated. a. no effect.
c. overstated. b. understated.
d. there is not enough information to determine the effect. c. overstated.
d. there is not enough information to determine the effect.
Compare the cost flow assumptions used to account for inventories
1. The following information is available for a company that uses a specific Consider the following inventory activity:
identification inventory system:
• October 1: Beginning inventory consisted of 200 units at a cost of $7.00
each. $1400
• October 7: 500 units were purchased at a cost of $8.00 each. 2000
• October 18: 250 units were sold from the October 7 purchase.
• October 22: 600 units were purchased at a cost of $8.50 each. 2125
• October 24: 300 units were purchased at a cost of $9.00 each.2700
• October 26: 350 units were sold from the October 22 purchase.
The 9 units of ending inventory are identified with the purchase of May 20.
What is the cost of goods sold (COGS) and the value of ending inventory for
October?
Using the specific identification method, what is the value of the ending
inventory and the cost of goods sold?
250x8=2000
a. $126 and $430, respectively.
350x8.50=2975 COGS=$4,975
b. $126 and $530, respectively.
Ending Inventory: $8,225
c. $126 and $544, respectively.
d. $56 and $474, respectively.
Determine the effects of inventory errors on the financial statements
2. A company that used the periodic inventory system overstated its beginning A company mistakenly understated ending inventory by $25,000 in a year
inventory but correctly stated its ending inventory. but verified the correct ending inventory was recorded in the following
year.
What will be the effect of this error on the financial statements at the end of the
period? What is the effect of this on the total net income for the two years
combined?
3. A company did not record the purchase of inventory and did not include this item A company uses a periodic inventory system. A $100 purchase is not
in the ending inventory balance. recorded in the purchase account for the year but is included in the ending
inventory count.
What is the effect of this on the financial statements?
What is the effect of this error on the company’s income statement?
4. A company uses a periodic inventory system. A $100 purchase is properly A company uses a periodic inventory system. A $100 purchase on account
recorded in the purchase account for the year but is excluded in the ending is inadvertently recorded in the purchase account as $200 for the year but
, inventory count. is correctly included in the ending inventory count as $100.
What is the effect of this error on the company’s financial statements? What is the effect of this error on the company’s financial statements?
5. A company uses a periodic inventory system. The company is holding $100 of A company uses a periodic inventory system. The company incorrectly
consigned goods and incorrectly includes them in its ending inventory count. The records inventory item purchases that were not received by the company’s
company discovered the error the following year and excludes the goods in its warehouse as of the last day of the most recent reporting period
inventory count for that year. (mistakenly including the goods in purchases AND in the ending inventory
count). The items were purchased under free on board (FOB) destination
What is the effect of this error on the company’s financial statements? terms. Therefore, they were not legally owned by the company on the
period ending date. The cost of the inventory purchased was $100,000.
The company balance sheet reports the following balances at the end of
the reporting period:
Current assets: $600,000
Current liabilities: $300,000
What are two effects of the error on the company’s balance sheet?
a. retained earnings are overstated.
b. net working capital is understated.
c. the current ratio is understated.
d. total purchases are overstated.
6. A company uses the periodic inventory costing system. The company includes A company uses the periodic inventory costing system and has a calendar
goods shipped to them f.o.b. shipping point in purchases but not ending year-end. The company starts the year with a beginning inventory that is
inventory. understated. There are no other errors in the year.
What is the effect on the current ratio? What is the effect of this inventory error on the company’s net income for
a. no effect. the calendar year?
b. understated. a. no effect.
c. overstated. b. understated.
d. there is not enough information to determine the effect. c. overstated.
d. there is not enough information to determine the effect.
