Question

The Kwok Company’s inventory balance on December 31, 2016, was $165,000 (based on a 12/31/16 physical count) before considering the following transactions:

1.	Goods shipped to Kwok f.o.b. destination on December 20, 2016, were received on January 4, 2017. The invoice cost was $30,000.
2.	Goods shipped to Kwok f.o.b. shipping point on December 28, 2016, were received on January 5, 2017. The invoice cost was $17,000.
3.	Goods shipped from Kwok to a customer f.o.b. destination on December 27, 2016, were received by the customer on January 3, 2017. The sales price was $40,000 and the merchandise cost $22,000.
4.	Goods shipped from Kwok to a customer f.o.b. destination on December 26, 2016, were received by the customer on December 30, 2016. The sales price was $20,000 and the merchandise cost $13,000.
5.	Goods shipped from Kwok to a customer f.o.b. shipping point on December 28, 2016, were received by the customer on January 4, 2017. The sales price was $25,000 and the merchandise cost $12,000.

Determine the correct inventory amount to be reported in Kwok’s 2016 balance sheet.

Answer 1

Concepts and reason

Inventory: It refers to the stock of goods held by an entity for carrying on business. Inventory constitutes raw material stored in the storeroom, work in progress used in production and finished goods available for sale.

Fundamentals

Periodic Inventory System: Under this System, no records are maintained for flows of Inventory, after a definite period, a physical check is made, a number of units left in hand are taken as ending inventory and value at any of the following methods:

Periodic FIFO method

Periodic LIFO method

Periodic Average Method

FOB shipping point: The full form of FOB shipping point is Free on board shipping point. It is the area near to the seller of the merchandise from where the goods are to be shipped to the buyer’s place. The sale of the inventory is deemed to be completed when the goods are transported to FOB shipping point.

FOB destination: The full form of FOB destination is a Free on-board destination. It is the area near to the buyer of the merchandise where the goods are to be shipped after the sale. The sale is deemed to be completed when the goods are transported to FOB destination.

Financial Statements: The statement prepared for the specific period which comprises the financial information of the organization. It includes a statement of income which shows the profitability of the business, balance sheet which represent the financial situation in the terms of assets, liabilities and capital, and cash flow statement which represents the cash flows for the accounting period.

Purchases: When the merchandise in which the entity deals, is purchased from outside suppliers, then that purchase is categorized under purchases. The goods can be purchased either on a cash basis or on credit basis. When the goods are purchased on credit basis, the period of the outstanding amount cannot be more than a year. The supplier should be paid within one year.

Sales: When the merchandise in which the entity deals, is sold to outside customers, then that sales is categorized under sales. The goods can be sold either on a cash basis or on credit basis. When the goods are sold on a credit basis, the period of the outstanding amount cannot be more than a year. The customer should clear the dues within one year.

Compute the value of adjustments to be made in the value of inventory as on 31 December 2016 in order to compute correct value of inventory as given below:

Compute the correct value of inventory of the year 2016 as given below:

$\begin{array}{c}\\{\rm{Correct value of inventory}} = {\rm{Inventory value on December 31, 2016}}\\\\ + {\rm{Total value of adjustments}}\\\\ = \$ 165,000 + \$ 39,000\\\\ = \$ 204,000\\\end{array}$

Ans:

The correct value of inventory to be described on Balance Sheet is $204,000.