Question

2.

Explain why net income is understated if ending inventory is understated. 5. Explain the difference between a product cost and a period cost, and why the product cost is referred to as “inventoriable.” 7. Explain why using FIFO as the inventory cost flow assumption would provide the greatest amount of net income. 9. Mordica Company will receive $400,000 in 7 years. If the appropriate annual interest rate is 12%, but interest is compounded quarterly, the present value of the $400,000 receipt is A. $180,940. B. $174,832. C. $884,272. D. $915,172.

Answer 1

2) Explain why net income is understated if ending inventory is understated.	5) Explain the difference between a product cost and a period cost, and why the product cost is referred to as “inventoriable.”	7) Explain why using FIFO as the inventory cost flow assumption would provide the greatest amount of net income	9) Mordica Company will receive $400,000 in 7 years. If the appropriate annual interest rate is 12%, but interest is compounded quarterly, the present value of the $400,000 receipt isA.$180,940.B.$174,832.C.$884,272.D.$915,172.
If ending inventory is understated , cost of goods sold will be overstated by the error amount, and net income and gross profit are understated. This happens because of following inventory errors:-	Product cost is the cost incurred in manufacturing the product it includes direct materials, direct labor, and manufacturing overhead	FIFO method assumes that the first unit making its way into inventory is the first sold.It gives a more accurate value for ending inventory on the balance sheet and it increases net income due to the age of the inventory being used in cost of goods sold.	Present Value = PV(12%/4,7x4,0,-400000) = 174,832
1) Physical inventory was miscounted	Period Cost is a cost associated with the selling and general administration incurred during the particular period.Period costs are not a part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory.		Present Value = 400000 x PV(3%,28) = 174,832
2) Costs were incorrectly assigned to inventory	Inventoriable cost is the cost that incurred when we purchased goods from the the supplier plus all costs necessary to get the item into inventory and ready for sale.Product cost is called inventoriable because If a product is unsold, the product costs will be reported as inventory on the balance sheet. When the product is sold, its cost is removed from inventory and will be included on the income statement as the cost of goods sold.
3) Incorrect identification of inventory items
4) Inventory in transit not dealt with incorrectly
5) Consignment inventory incorrectly dealt with