1. Why is it important to periodically take a physical inventory if the perpetua
ID: 2443063 • Letter: 1
Question
1. Why is it important to periodically take a physical inventory if the perpetual system is used?2. Which of the three methods of inventory costing - FIFO, LIFO or average cost will yield (a) the highest inventory cost (b) the lowest inventory cost (c) the highest gross profit and (d) the lowest gross profit?
3. Because of imperfections, an item of merchandise cannot be sold at its normal selling price. How should this item be valued for financial statement purposes?
4. The inventory at the end of the year was understated by $12,750 (a) Did the error cause an overstatement or understatement of the gross profit for the year? (b) Which items on the balance sheet at the end of the year were overstated or understated as a result of the error?
5. A manufacturer shipped merchandise to a retailer on a consignment basis. If the merchandise is unsold at the end of the period, in whose inventory should the merchandise be included?
Thank you guys
Explanation / Answer
1. Theft/Spoilage. If I sell t-shirts and only use the perpetual system, I will notice at the end of the year, that my physical inventory is different from my perpetual one because kids come in and steal or damage my t-shirts.
2. a. LIFO b. FIFO c. average cost d. LIFO (Note, I'm assuming no price fluctuations because you didn't specify)
3. It should be valued at its net realizable value.
4. a. understatement b. stockolder's equity was overstated or liabilities were understated by the same amount.
5. The manufacturer's. Although the distributor/customer has the inventory in his/her possession, it is still the property of the manufacturer and should therefore be included in the manufacturer's inventory. Please remember to rate!
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