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Inventory errors

Financial Accounting
Course Code
Liang Chen

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Inventory errors
Income Statement effects
¾ An error in ending inventory of the current period will have a reverse effect on net
income of the next period
Balance Sheet effects
Statement Valuation and Presentation
Valuing Inventory at the lower of cost and market (LCM)
¾ Sometimes, inventory value is lower than its cost. The inventory can be written down
to its market value
¾ LCM is an example of the accounting concept of conservatism. Conservatism means
that when choosing among alternatives, the best choice is the method that is least
likely to overstate assets and net income
¾ For a merchandising company, net realizable value is the selling price less any costs
required to make the goods ready for sale
¾ LCM is applied after the costing methods
Classifying Inventory
¾ How a company classifies their inventory is based on whether they are a
merchandiser or manufacturer.
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