Question

Linsang Corporation's retail store and warehouse closed for an entire weekend while the year-end inventory was counted. When the count was finished, the controller gathered all the count books and information from the clerical staff, completed the ending inventory calculations, and prepared the following partial income statement for the general manager for Monday morning: Sales $2,750,000 Beginning inventory $ 650,000 Purchases 1,550,000 Total goods available for sale 2,200,000 Less ending inventory 650,000 Cost of goods sold 1,550,000 Gross profit $1,200,000 The general manager called the controller into her office after quickly reviewing the preliminary statements. “You've made an error in the inventory,” she stated. “My pricing all year has been carefully controlled to provide a gross profit of 35%, and I know the sales are correct.” Instructions a. How much should the ending inventory have been? b. If the controller's ending inventory amount was due to an error, suggest where the error might have occurred.

Answer 1

	Gross Profit as per General Manager = $ 2,750,000 sales x 35% = $ 962,500
	Cost of Goods Sold = $ 2,750,000 sales - $ 962,500 gross profit= $ 1,787,500
	Expected ending inventory = Total Goods available for sale – Cost of Goods Sold
	= $ 2,200,000 – 1,787,500
	= $ 412,500 Answer
	If controller's ending inventory amount was due to an error, suggest where the error might have occurred
a)	There may be incorrect unit count.When the physical count of inventory is incorrect which will result in error in ending inventory
b)	There may be Incorrect inventory layering-If there is a inventory layering system such as LIFO & FIFO,system has to assign cost
	based on this.If there is system error, there will be an error in ending inventory
c)	Inventory error may be due to improper cut off-Inventory may arrived at during a physical count,but corresponding
	supplier invoice may not have reached
d)	Inventory error may be due to incorrect standard Costing system
e)	Customer owned inventory. Some Inventory of customers will be on company's location but wrongley
	taken into Physical count
f)	Consignment inventory-May forget to count the inventory on consignment at retailers
g)	Transfer imbalance may also cause inventory error- There will be a set up to reduce the inventory quantity in one department
	, and increase the inventory quantity in another department when you are transferring inventory inside the company.
	If you do one but not the other, there will be inventory error