Question

Chapter 7: Inventory

Additionally, please refer to Chapter 7 in your Cengage Accounting eText, accessible from the eText link in the Course Navigation Panel to the left of your screen.

Requirement 1:

The inventory at the end of the year was understated by $14,750. (a) Did the error cause an overstatement or an 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?

Requirement 2:

In Financial Accounting I, you learned that the cost concept of accounting requires accountants to record all items purchased at their cost. In Chapter 7 of your Cengage Accounting eText, you learned that inventory may be written down to its current replacement cost or its net realizable value if these amounts are lower than original cost. Why do you think the accounting profession has decided to violate the cost concept and reduce the value of inventory in these circumstances?

Responses to Classmates:

Please explain to your classmates why it is important to take a physical inventory periodically when using a perpetual inventory system.

Response to Instructor:

Please check your thread for questions or comments from me and be sure to provide a comprehensive response, as requested.

Writing:

Please make sure that your initial post contains a properly cited reference. Please use APA style. You should cite your text as a minimum. Additionally, check your spelling and proofread your post before you hit the submit button.

Answer 1

Requirement 1.	(a)
	Inventory errors are sometimes caused when there are mistakes in Physical count,
	in pricing the inventory correctly or in recognising the transfer of title for the goods
	in transit. These inventory errors affect both income statement and balance sheet.
	The inventory at the year end is understated by $14750.
	(b)
	Inventory and Stockholder's Equity were understated by $14,750.
Requirement 2.	Because of conservatism concept.
	Conservatism dictates that accountants avoid overstatement of assets and income.
	In the case of inventory, a company may find itself holding inventory that has an uncertain future; meaning the company does not know if or when it will sell. Obsolescence, over supply, defects, major price declines, and similar problems can contribute to uncertainty about the “realization” (conversion to cash) for inventory items. Therefore, accountants evaluate inventory and employ lower of cost or net realizable value considerations. This simply means that if inventory is carried on the accounting records at greater than its net realizable value (NRV), a write-down from the recorded cost to the lower NRV would be made. In essence, the Inventory account would be credited, and a Loss for Decline in NRV would be the offsetting debit. This debit would be reported in the income statement as a charge against (reduction in) income
Responses to Classmates:	It should be taken periodically to test the accuracy of the perpetual records. In addition, a physical inventory will identify inventory shortages or shrinkage.