Question

37. Inventory records for MOM Company revealed the following:

Date	Transaction	Number of Units	Unit Cost
Mar. 1	Beginning inventory	200	$66.00
Mar. 6	Purchase	1,000	$66.50
Mar. 16	Purchase	1,000	$66.80
Mar. 23	Purchase	1,000	$66.90

MOM sold 3,190 units of inventory during the month. Ending inventory assuming FIFO would be $______________

38. Inventory records for STC Company revealed the following:

Date	Transaction	Number of Units	Unit Cost
Mar. 1	Beginning inventory	100	$25.00
Mar. 3	Purchase	500	$25.50
Mar. 23	Purchase	400	$26.00

STC sold 980 units of inventory during the month. Ending inventory assuming Weighted Average would be $___________

Use the following to answer questions 39 –40

MATCH… For each of the following independent situations, fill in the blanks to indicate the effect of the error on each of the various financial statement items. Assume that each of the companies uses a periodic inventory system. Indicate:

(A) an understatement

(B) an overstatement or

(C) no effect, correct

		Balance Sheet		Income Statement
	Error	Ending Inventory	Retained Earnings	Cost of Goods Sold	Net Income
39.	Understated EI in year 1, affect on items in year 1.	a.	b.	c.	d.
40.	Understated EI in year 1, affect on items in year 2.	a.	b.	c.	d.

Answer 1

37) Under FIFO method, goods purchased first are sold first. Therefore Ending inventory under FIFO includes the goods purchased in last.

Units in Ending Inventory = Beg Inventory+Units purchased-Units sold

= 200+(1,000+1,000+1,000)-3,190 = 10 units

In the given case, these 10 units of ending inventory is from goods purchased on Mar. 23 at $66.90 (As FIFO method is assumed).

Ending Inventory = 10 units*$66.90 = $669

Therefore, Ending inventory assuming FIFO would be $669.

38) Under weighted average cost method, weighted average cost per unit is used for valuation of ending inventory.

Weighted Average cost per unit = Total cost of goods available/Total units available

Calculation of Total cost of goods available   (Amounts in $)

Date	Transaction	Number of Units (A)	Unit Cost (B)	Total Cost (A*B)
Mar. 1	Beginning inventory	100	25.00	2,500
Mar. 3	Purchase	500	25.50	12,750
Mar. 23	Purchase	400	26.00	10,400
	Total Cost	1,000		25,650
Weighted Average cost (25,650/1,000 units)				25.65 per unit

Units in Ending Inventory = Total units available - Units sold

= 1,000 units - 980 units = 20 units

Cost of Ending Inventory = Units in ending inventory*Weighted average cost per unit

= 20 units*$25.65 per unit = $513

Therefore, Ending inventory assuming Weighted Average would be $513.

39 & 40) Table showing the required effects

	Balance Sheet		Income Statement
	Error	Ending Inventory	Retained Earnings	Cost of Goods Sold	Net Income
39.	Understated EI in year 1, affect on items in year 1.	a) an understatement	b) an understatement	c) an overstatement	d) an understatement
40.	Understated EI in year 1, affect on items in year 2.	a) no effect, correct	b) an overstatement	c) an understatement	d) an overstatement

39) If ending inventory is understated then cost of goods sold will be overstated (as ending inventory is deducted for calculating cost of goods sold). As cost is overstated, the net income of year 1 will be understated which also understate the retained earnings balance in balance sheet.

40) The ending inventory in year 1 will become beginning inventory in year 2. If beginning inventory is understated then it has no effect on ending inventory in balance sheet but cost of goods sold will be understated (as beginning inventory is added for calculating cost of goods sold). As cost is understated, the net income for year 2 will be overstated which also overstate the retained earnings balance in balance sheet.