Exercise 5-12B: Effect of Inventory Error on Financial Statements: Perpetual System
Bosh Company failed to count $22,000 of inventory in its Year 1 year-end physical count.
Required
Explain how this error will affect Bosh’s Year 1 financial statements, assuming that Bosh uses the perpetual inventory system.
Exercise 5-13B: Effect of Inventory Misstatement on Elements of Financial Statements
The ending inventory for Oak Co. was erroneously written down, causing an understatement of $6,500 at the end of Year 2.
Required
Was each of the following amounts overstated, understated, or not affected by the error?
| Item No. | Year | Amount |
|---|---|---|
| 1 | Year 2 | Beginning inventory |
| 2 | Year 2 | Purchases |
| 3 | Year 2 | Goods available for sale |
| 4 | Year 2 | Cost of goods sold |
| 5 | Year 2 | Gross margin |
| 6 | Year 2 | Net income |
| 7 | Year 3 | Beginning inventory |
| 8 | Year 3 | Purchases |
| 9 | Year 3 | Goods available for sale |
| 10 | Year 3 | Cost of goods sold |
| 11 | Year 3 | Gross margin |
| 12 | Year 3 | Net income |
Exercise 5-14B: Estimating Ending Inventory Using the Gross Margin Method
Frank Jones, the owner of Frank’s Hunting Supplies, is surprised at the amount of actual inventory at the end of the year. He thought there should be more inventory on hand based on the amount of sales for the year. The following information is taken from the books of Frank’s Hunting Supplies:
- Beginning inventory $250,000
- Purchases for the year $500,000
- Sales for the year $850,000
- Inventory at the end of the year (based on actual count) $40,000
Historically, Frank has made a 20 percent gross margin on his sales. Frank thinks there may be some problem with the inventory. Evaluate the situation based on the historical gross profit percentage.
Required
Estimate the following:
a. Gross margin in dollars.
b. Cost of goods sold in dollars.
c. Estimated ending inventory.
d. Inventory shortage.
e. Provide an explanation for the shortage.
Exercise 5-15B: Estimating Ending Inventory: Perpetual System
Beth Malone owned a small company that sold boating equipment. The equipment was expensive, and a perpetual system was maintained for control purposes. Even so, lost, damaged, and stolen merchandise normally amounted to 5 percent of the inventory balance. On June 14, Beth’s warehouse was destroyed by fire. Just prior to the fire, the accounting records contained a $130,000 balance in the Inventory account. However, inventory that cost $20,000 had been sold and delivered to customers the day of the fire but had not been recorded in the books at the time of the fire. The fire did not affect the showroom, which contained inventory that cost $50,000.
Required
Estimate the amount of inventory destroyed by fire.
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