Inventory Errors. Appendix 5A. Short Exercises. Exercises

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1 Appendix 5A Inventory Errors Short Exercises SE5A-1A. Calculate inventory errors. (LO 8). How would each of the following inventory errors affect net income for the year? Assume each is the only error during the year. 1. Ending inventory is overstated by $3, Ending inventory is understated by $1, Beginning inventory is understated by $3, Beginning inventory is overstated by $1,550. SE5A-2B. Calculate inventory errors. (LO 8). How would each of the following inventory errors affect net income for the year? Assume each is the only error during the year. 1. Ending inventory is overstated by $1, Ending inventory is understated by $2, Beginning inventory is understated by $4, Beginning inventory is overstated by $2,500. Exercises E5A-3A. Calculate inventory errors. (LO 8). Ian s Small Appliances reported cost of goods sold as follows: Beginning inventory $130,000 $ 50,000 Purchases 275, ,000 Cost of goods available for sale 405, ,000 Ending inventory 50,000 40,000 Cost of goods sold $355,000 $250,000 Ian s made two errors: ending inventory was understated by $5, ending inventory was overstated by $2,000. Calculate the correct cost of goods sold for 2009 and A-1

2 5A-2 FINANCIAL ACCOUNTING 3/E SOLUTIONS MANUAL E5A-4B. Calculate inventory errors. (LO 8). Tire Pro Company s records reported the following at the end of the fiscal year: Beginning inventory $ 80,000 Ending inventory 85,000 Cost of goods sold 295,000 A physical inventory count showed that the ending inventory was actually $78,000. If this error is not corrected, what effect would it have on the income statement for this fiscal year and the following fiscal year? Problems P5A-5A. Analyze results of physical count of inventory and calculate cost of goods sold. (LO 8). Matrix Company uses a periodic, weighted average inventory system. The company s accounting records showed the following related to November 2010 transactions: Units Cost Beginning inventory, November $ 900 Purchases during November 1,250 4,275 Goods available for sale 1,650 $5,175 Cost of goods sold 1,300 4,077 Ending inventory, November $1,098 On November 30, 2010, Matrix conducted a physical count of its inventory and discovered there were only 300 units of inventory actually on hand. Requirements 1. Using the information from the physical count, correct the company s cost of goods sold for November. 2. How would this correction change the financial statements for this month? 3. What are some possible causes of the difference between the inventory amounts in the accounting records and the inventory amount from the physical count?

3 APPENDIX 5A INVENTORY ERRORS 5A-3 P5A-6B. Analyze results of physical count of inventory and calculate cost of goods sold. (LO 8). Paige s Office Paper Company uses a perpetual inventory system, so the cost of goods sold is recorded and the inventory records are updated at the time of every sale. The company s accounting records showed the following related to September 2009 transactions: Units Total Cost Beginning inventory, September $ 1,500 Purchases during September 3,750 11,250 Goods available for sale 4,250 $12,750 Cost of goods sold 2,200 6,600 Ending inventory, September 30 2,050 $ 6,150 On September 30, 2009, Paige conducted a physical count of its inventory and discovered there were actually 1,900 units of inventory on hand. Requirements 1. Using the information from the physical count, correct Paige s Office Paper s cost of goods sold for September. 2. How would this correction change the financial statements for the month? 3. What are some possible causes of the difference between the inventory amounts in the company s accounting records and the inventory amount from the physical count?

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5 Appendix 5B Gross Profit Method of Estimating Ending Inventory Short Exercise SE5B-1A. Estimate inventory. (LO 9). Fantasy Games, Inc., wants to estimate its ending inventory balance for its quarterly financial statements for the first quarter of the year. Given the following, what is your best estimate? Beginning inventory $75,800 Net sales $92,500 Net purchases $50,500 Gross profit ratio 20% SE5B-2B. (Estimate inventory. (LO 9). Knick-Knacks wants to estimate its ending inventory balance for its quarterly financial statements for the first quarter of the year. Given the following, what is your best estimate? Beginning inventory $3,800 Net sales $9,500 Net purchases $5,500 Gross profit ratio 20% 5B-1

6 5B-2 FINANCIAL ACCOUNTING 3/E SOLUTIONS MANUAL Exercises E5B-3A. Estimate inventory. (LO 9). The following information is available for the Arizona Chemical Supply Company: Inventory, January 1, 2009 $240,000 Net purchases for the month of January 750,000 Net sales for the month of January 950,000 Gross profit ratio (historical) 40% Estimate the cost of goods sold for January and the ending inventory at January 31, E5B-4B. Estimate inventory. (LO 9). The records of Florida Tool Shop revealed the following information related to inventory destroyed in Hurricane Frances: Inventory, beginning of period $300,000 Purchases to date of hurricane 140,000 Net sales to date of hurricane 885,000 Gross profit ratio 55%

7 APPENDIX 5B GROSS PROFIT METHOD OF ESTIMATING ENDING INVENTORY 5B-3 The company needs to file a claim for lost inventory with its insurance company. What is the estimated value of the lost inventory? Problems P5B-5A. Estimate inventory. (LO 9). Hines Fruit Corp. sells fresh fruit to tourists on Interstate 75 in Florida. A tornado destroyed the entire inventory in late June. In order to file an insurance claim, Hazel and Gene, the owners of the company, must estimate the value of the lost inventory. Records from January 1 through the date of the tornado in June indicated that Hines Fruit Corp. started the year with $4,000 worth of inventory on hand. Purchases for the year amounted to $9,000, and sales up to the date of the tornado were $16,000. Gross profit percentage has traditionally been 30%. Requirements 1. How much should Hazel and Gene request from the insurance company? 2. Suppose that one case of fruit was spared by the tornado. The cost of that case was $700. How much was the inventory loss under these conditions? P5B-6B. Estimate inventory. (LO 9). Carrie s Cotton Candy Company sells cotton candy to visitors at a traveling county fair. During a drought a fire destroyed the entire inventory in late July. In order to file an insurance claim, Carrie, the owner of the company, must estimate the value of the lost inventory. Records from January 1 through the date of the fire in July indicated that Carrie s Cotton Candy Company started the year with $4,250 worth of inventory on hand. Purchases for the year amounted to $8,000, and sales up to the date of the fire were $17,500. Gross profit percentage has traditionally been 35%. Requirements 1. How much should Carrie request from the insurance company? 2. Suppose that one bag of cotton candy mix was spared by the fire. The cost of that bag was $50. How much was the inventory loss under these conditions?

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