Question

In: Accounting

You, CPA, are employed as an audit senior at an accounting firm. You were recently assigned...

You, CPA, are employed as an audit senior at an accounting firm.

You were recently assigned to the audit of the financial statements of Medical Supplies Ltd. (MSL). Your first task is to ensure that the inventory balance reported on MSL’s statement of financial position is accurate. MSL’s accountant has provided the following details regarding the inventory count performed on December 31, 2019:

  • Only inventory on the shelves, in storage and in the receiving area was counted. These inventory items had a cost of $165,000.
  • On December 31, MSL held inventory on consignment with a cost of $11,500. Since the inventory was on hand, it was included in the inventory count.
  • Inventory purchased from a supplier at a cost of $21,250 had not arrived at MSL on December 31. The inventory was shipped FOB destination and was received at MSL on January 3.
  • On December 31, MSL shipped inventory to a customer. The inventory with a cost of $4,400 was shipped FOB shipping point and was received by the customer on January 6.

Since you know that the partner in charge of MSL’s audit will have questions, you plan to calculate the correct inventory balance as at December 31. You intend to provide detailed supporting calculations and round all amounts to the nearest dollar. For any amounts that should be EXCLUDED from inventory, you also plan to BRIEFLY EXPLAIN the reason .

(Please insert response here.)

The partner has also requested that you assist Cheapskates Ltd. (CL), a client that operates a discount store similar to those operated by Dollarama and Dollar Giant, with the accounting for its inventory.

CL’s bookkeeper has provided the following information regarding its inventory of St. Patrick’s Day novelties:

Date

Description

Number of Units

Cost per Unit

Total Cost

March 1

Beginning inventory

1,500

$3.00

$4,500.00

March 2

Purchase

6,000

3.40

20,400.00

March 9

Purchase

3,000

3.20

9,600.00

March 16

Purchase

4,500

3.80

17,100.00

CL sold 4,500, 2,000 and 7,500 units from March 2 to 8, March 9 to 15 and March 16 and 17, respectively. None of the novelties were sold after March 17. CL ended March with 1,000 units in inventory.

CL uses a PERIODIC inventory system to account for all holiday novelties.

Assuming that CL accounts for its inventory using FIFO, you have been asked to calculate ending inventory AND cost of goods sold (in dollars ONLY). You intend to clearly label your work, provide detailed supporting calculations and round all amounts to the nearest cent (3.5 marks).

(Please insert response here.)

Assuming that CL accounts for its inventory using AVERAGE COST, you have been asked to calculate ending inventory AND cost of goods sold (in dollars ONLY). You intend to clearly label your work, provide detailed supporting calculations and round all amounts to the nearest cent (4.5 marks).

(Please insert response here.)

Solutions

Expert Solution

Note:1:

The term FOB is an abbreviation of free on board.

If goods are shipped FOB destina­tion, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer. These goods are part of the seller’s inventory while in transit.

If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in transit.

The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determi­nations originates in agency law, since transfer of title is conditioned upon whether the car­rier with physical possession of the goods is acting as an agent of the seller or the buyer.

Note:2:

If the consignee can't sell the products, it returns them to the consignor. If it sells them, it remits the selling price to the consignor and takes a commission. Products held on consignment are included in the consignor's inventory, not the consignee's, even though they are not in the consignor's physical possession.

The Inventory on consignment should be excluded from inventory.


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