Questions on Inventory Costing
Due to a clerical error, a company overstated by $50,000 the amount of inventory on hand at the end of the year. Will net income for the year be overstated or understated? Identify the two accounts on the year-end balance sheet that will be in error and indicate whether they will be understated or overstated.
Error:
The ending inventory is overstated by $50,000.
Effect on net income:
When the ending inventory is overstated, then, the cost of goods sold expense will be understated as the ending inventory is deducted from the goods available for sale to calculate the cost of the goods sold expense.
As the cost of goods sold expense is understated, the net income for that period will be overstated.
Name of the two accounts on the year ending balance sheet, which will be affected by the inventory error.
Accounts to be affected:
Retained Earnings: Overstated as net income is overstated.
Ending Inventory: Over Stated
Write the letter of the method that is most applicable to each statement.
a. Specific identification
b. Average cost
c. First-in, first-out (FIFO)
d. Last-in, first-out (LIFO)
____A___ 1. Is the most realistic ending inventory
____D___ 2. Results in cost of goods sold being closest to current product costs
____C___ 3. Results in highest income during periods of inflation
____C___ 4. Results in highest ending inventory during periods of inflation
____B___ 5. Smooths out costs during periods of inflation
____A___ 6. Is not practical for most businesses
____B___ 7. Puts more weight on the cost of the larger number of units purchased
____A___ 8. Is an assumption that most closely reflects the physical flow of goods for most businesses
____D___ 9. Is not an acceptable method under IFRS
Businesses incur various costs in selling goods and services. Each business must decide which costs are expenses of the period and which should be included in the cost of the inventory. The following table lists various types of businesses along with certain
Error:
The ending inventory is overstated by $50,000.
Effect on net income:
When the ending inventory is overstated, then, the cost of goods sold expense will be understated as the ending inventory is deducted from the goods available for sale to calculate the cost of the goods sold expense.
As the cost of goods sold expense is understated, the net income for that period will be overstated.
Name of the two accounts on the year ending balance sheet, which will be affected by the inventory error.
Accounts to be affected:
Retained Earnings: Overstated as net income is overstated.
Ending Inventory: Over Stated
Write the letter of the method that is most applicable to each statement.
a. Specific identification
b. Average cost
c. First-in, first-out (FIFO)
d. Last-in, first-out (LIFO)
____A___ 1. Is the most realistic ending inventory
____D___ 2. Results in cost of goods sold being closest to current product costs
____C___ 3. Results in highest income during periods of inflation
____C___ 4. Results in highest ending inventory during periods of inflation
____B___ 5. Smooths out costs during periods of inflation
____A___ 6. Is not practical for most businesses
____B___ 7. Puts more weight on the cost of the larger number of units purchased
____A___ 8. Is an assumption that most closely reflects the physical flow of goods for most businesses
____D___ 9. Is not an acceptable method under IFRS
Businesses incur various costs in selling goods and services. Each business must decide which costs are expenses of the period and which should be included in the cost of the inventory. The following table lists various types of businesses along with certain