ACCT 1220 Chapter 6: Reporting and Analyzing Inventory

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erinsea-lion639

15 Feb 2017

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Regardless of the inventory system that they use, companies need to determine their inventory quantities at the end of each accounting period by physically counting inventory. Perpetual accounting records show how much inventory should be on hand, so they do(cid:374)"t sho(cid:449) (cid:449)hat is actually on hand. At year end companies still need to physically count the inventory for two reasons: to check the accuracy of their perpetual inventory records, to determine the amount of inventory lost die to shrinkage or theft. Companies that use the periodic system must also take physical inventory to determine the ending inventory. Regardless of method taking inventory quantities involves two steps: taking physical inventory of goods on hand, determining the ownership of goods. To reduce the number of errors discovered during an inventory count, a company needs to have a good system of internal control.

Related Questions

MATCHING

Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand.

Statement where net income is determined by deducting all expenses from all revenues.

Inventory system that updates the merchandise inventory account for every purchase and sale transaction.

Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered.

Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier.

Statement that includes subtotals for net sales, gross profit, and net operating income in determining net income.

Losses of inventory due to theft, damage, spoilage, etc. that cause the actual inventory on hand to be less than that on record.

Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise.

FOB destination
Periodic inventory system

Credit terms
FOB shipping point

Multiple-step income statement
Inventory shrinkage

Perpetual inventory system

Single-step income statement

The following audit procedures were performed in the audit of

inventory to satisfy speci(c balance-related audit objectives as

discussed in Chapter 6. The audit procedures assume that the

auditor has obtained the inventory count sheets that list the client’s

inventory. The general balance-related audit objectives from

Chapter 6 are also included.

Audit Procedures

1. Test extend unit prices times quantity on the inventory list, test foot

the list, and compare the total to the general ledger.

2. Trace selected quantities from the inventory list to the physical

inventory to make sure that it exists and the quantities are the same.

3. Question operating personnel about the possibility of obsolete or slow-

moving inventory.

4. Select a sample of quantities of inventory in the factory warehouse and

trace each item to the inventory count sheets to determine if it has

been included and if the quantity and description are correct.

5. Compare the quantities on hand and unit prices on this year’s

inventory count sheets with those in the preceding year as a test for

large di5erences.

6. Examine sales invoices and contracts with customers to determine

whether any goods are out on consignment with customers. Similarly,

examine vendors’ invoices and contracts with vendors to determine

whether any goods on the inventory listing are owned by vendors.

7. Send letters directly to third parties who hold the client’s inventory and

request that they respond directly to the auditors.

General Balance-Related Audit Objectives

Existence Cuto5

Completeness Detail tie-in

Accuracy Realizable value

Classi$cation Rights and obligations

Required

a. Identify the type of audit evidence used for each audit procedure.

b. Identify the general balance-related audit objective or objectives

satis$ed by each audit procedure

jadeshark994

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at that time totaled $75,000, which reflects historical cost.âPurchases are $350,000.

Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.

Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value.â

Please Help! Iâm not sure about the Loss method for accounting for adjustments of inventory to market value.

I have the following:

BOOK VALUE (HISTORICAL COST) = 75,000

NRV = MV+ESTIMATED COSTâ

110,000 + 15% of 110,000 = NRV 93,500

There is no adjustment required since historical cost is less than NRV.

You can only make allowance for losses not profit. Is that correct or do I need to make an entry for $16,500?

chocolateferret211

ACCT 1220 Chapter 6: Reporting and Analyzing Inventory

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