6.4 - Inventory Errors and Statement Valuation

Question 1

Inventory Errors - IS Effects

Answer 1

Both beginning and ending inventories appear on the income statement

The ending inventory of one period automatically becomes the beginning inventory of the next period

Inventory errors affect the
determination of cost of goods sold and net income

Question 2

The effects on cost of goods sold can be determined by

Answer 2

entering the incorrect data in the below formula and then SUBSTITUTING the correct data

beg inventory + cost of goods purchased - ending inventory = COGS

Question 3

Effects of Inventory Errors on Current Year’s Income Statement

Answer 3

An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.

Question 4

Ending Inventory Error – Balance Sheet Effects

Answer 4

An error in ending inventory in one period will cause an error in beginning inventory in the next period

Effect can be determined by using the basic accounting equation

Question 5

When the value of inventory is lower than the cost…

Answer 5

the inventory is written down to its market value

This is known as the lower of cost and market (LCM) method

Question 6

Market is defined as what

Answer 6

replacement cost or net realizable value

Question 7

Net realizable value

Answer 7

selling price less any costs to make the goods ready for sale

Question 8

The lower of cost and NRV is applied to what

Answer 8

individual items, not total inventory.

However, it can be applied to similar groups of items.