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Lead to stockouts and lost sales 6 37 so 5 compute

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Unformatted text preview: Compute and interpret the inventory turnover ratio. 6-40 Analysis of Inventory Analysis of Inventory Analysts’ Adjustments for LIFO Reserve Companies using LIFO are required to report the amount that inventory would increase (or occasionally decrease) if the company had instead been using FIFO. This amount is referred to as the LIFO reserve. Illustration 6-17 6-41 SO 6 Describe the LIFO reserve and explain its importance SO for comparing results of different companies. for Analysis of Inventory Analysis of Inventory Analysts’ Adjustments for LIFO Reserve The LIFO reserve can have a significant effect on ratios analysts commonly use. Illustration 6-19 6-42 SO 6 Describe the LIFO reserve and explain its importance SO for comparing results of different companies. for appendix 6A Illustration: Perpetual Inventory System Illustration 6A-1 Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost. 6-43 SO 7 Apply the inventory cost flow methods to perpetual inventory records. appendix 6A “First-In-First-Out (FIFO)” Cost of Goods Sold 6-44 Perpetual Inventory System Illustration 6A-2 Ending Inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records. appendix 6A “Last-In-First-Out (LIFO)” Cost of Goods Sold 6-45 Perpetual Inventory System Illustration 6A-3 Ending Inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records. appendix 6A “Average-Cost” Cost of Goods Sold 6-46 Perpetual Inventory System Illustration 6A-4 Ending Inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records. appendix 6B Inventory Errors Inventory Errors Common Cause: Not properly recognizing the transfer of legal title to goods in transit. 6-47 Failure to count or price inventory correctly. Errors affect both the income statement and balance sheet. SO 8 Indicate the effects of inventory errors on the financial statements. appendix 6B Inventory Errors Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income. Illustration 6-B1 Illustration 6-B2 6-48 SO 8 Indicate the effects of inventory errors on the financial statements. appendix 6B Inventory Errors Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income in two periods. Over the two years, the total net income is correct because the errors offset each other. 6-49 An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Ending inventory depends entirely on the accuracy of taking and costing the inventory. SO 8 Indicate the effects of inventory errors on the financial statements. Inventory Errors appendix 6B Sales 2011 Incorrect Correct 2012 Incorrect Correct $ Illustration 6-B3 $ 80,000 $ 80,000 90,000 $ 90,000 Beginning inventory 20,000 20,000 12,000 15,000 Cost of goods purchased 40,000 40,000 68,000 68,000 Cost of goods available 60,000 60,000 80,000 83,000 Ending inventory 12,000 15,000 23,000 23,000 Cost of good sold 48,000 45,000 57,000 60,000 Gross profit 32,000 35,000 33,000 30,000 Operating expenses 10,000 10,000 20,000 20,000 Net income $ Combined income for 2-year period is correct. 6-50 22,000 $ 25,000 ($3,000) Net Income understated $ 13,000 $ 10,000 $3,000 Net Income overstated SO 8 Indicate the effects of inventory errors on the financial statements. appendix 6B Inventory Errors Review Question Understating ending inventory will overstate: a. assets. b. cost of goods sold. c. net income. d. owner's equity. 6-51 SO 8 Indicate the effects of inventory errors on the financial statements. appendix 6B Inventory Errors Balance Sheet Effects Effect of inventory errors on the balance sheet is determined by using the basic accounting equation: Illustration 6-B1 Illustration 6-B4 6-52 SO 8 Indicate the effects of inventory errors on the financial statements....
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This note was uploaded on 09/27/2013 for the course MGT 11A taught by Professor Armstrong during the Fall '08 term at UC Davis.

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