302114 Flashcards
Eliason Company discovered an overstatement of ending inventory at the end of 20X5 of $27,000. Which of the following is a result of this overstatement?
Net income is understated by $27,000.
Cost of goods sold is overstated by $27,000.
Retained earnings is correctly stated.
Net income is overstated by $27,000.
The overstatement of ending inventory will cause cost of goods sold to be understated by $27,000 because that inventory should have been removed from inventory and recognized into cost of goods sold. Because cost of goods sold is too low (understated) by $27,000, ignoring any income tax effect, this error will carry through the remainder of the income statement so that net income will be overstated (not understated) by $27,000. At the end of 20X5, ignoring any income tax effect, retained earnings will be overstated by $27,000 because the error in net income will flow into retained earnings.
Cost of Goods Sold
The cost of goods sold is all costs that were included in the value of the units of finished product sold during the period.
Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold
Inventory
The aggregate of items of tangible personal property owned by the business (to which the firm has legal title) intended either for internal consumption in the production of goods for sale or for sale is considered inventory. The balance of costs applicable to goods on hand, including raw materials (for use in the production process), intermediate products and parts still in the production process (work-in-process), and finished goods is also considered inventory.
The major objective of accounting for inventories is to facilitate the determination of income. This is achieved through the proper valuation of inventories—the measurement of the value of the current assets and inventories, and the measurement of the related expense and cost of goods sold.
The basis of inventory accounting is cost. Inventories are valued at acquisition or production cost, which is generally held to be the sum of the purchase price plus indirect acquisition costs (freight, insurance, and handling) for purchased goods and the sum of direct materials, direct labor, and allocated factory overhead (i.e., the appropriate general and administrative costs that are clearly related to production) for manufactured goods. Selling, general, and administrative costs not directly related to production should be expensed rather than included in the valuation of inventory, which involves the use of judgment.
Standard costs may be used for inventory pricing so long as they are adjusted at reasonable intervals to reflect current conditions.
Valuation (pricing) of inventories involves:
- determination of physical quantity (number of units) and
- unit cost (in dollars).
Unit cost depends on the choice from among various alternative pricing (cost flow) assumptions:
- last-in, first-out (LIFO),
- first-in, first-out (FIFO),
- weighted average, and
- specific identification.
Consideration must also be given to the cost principle (i.e., the lower-of-cost-or-market rule (LCM)).
Inventories must be compiled periodically (physical count) and valued and compared to the amounts recorded in the accounts. Accounting records can be maintained under a periodic or perpetual system.
FASB ASC 330-10
2112.01
An example of a comparative income statement (statement of profit or loss) for Tiger Co. for the years 20X2 and 20X1 is presented as follows.
2310.02
Definitions of the three types of accounting changes and correction of errors and examples of each are given as follows:
