Solution the lowest value for each inventory type is

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Solution The lowest value for each inventory type is: gas $79,000, wood $250,000, and pellet $101,000.The total inventory value is the sum of these amounts, $430,000. (b) Visual Company overstated its 2010 ending inventory by $22,000. Determine the impact this error has on ending inventory, cost of goods sold, and owner’s eq- uity in 2010 and 2011. Solution 2010 2011 Ending inventory $22,000 overstated No effect Cost of goods sold $22,000 understated $22,000 overstated Owner’s equity $22,000 overstated No effect Presentation As indicated in Chapter 5, inventory is classified in the balance sheet as a current asset immediately below receivables. In a multiple-step income statement, cost of goods sold is subtracted from sales. There also should be disclosure of (1) the STATEMENT PRESENTATION AND ANALYSIS PDF Watermark Remover DEMO : Purchase from to remove the watermark
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266 Chapter 6 Inventories major inventory classifications, (2) the basis of accounting (cost, or lower-of-cost- or-market), and (3) the cost method (FIFO, LIFO, or average). Wal-Mart , for example, in its January 31, 2008, balance sheet reported invento- ries of $35,180 million under current assets.The accompanying notes to the financial statements, as shown in Illustration 6-20, disclosed the following information. Illustration 6-20 Inventory disclosures by Wal-Mart WAL-MART STORES, INC. Notes to the Financial Statements Note 1. Summary of Significant Accounting Policies Inventories The Company values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substan- tially all of the Wal-Mart Stores segments’ merchandise inventories. SAM’S CLUB mer- chandise and merchandise in our distribution warehouses are valued based on the weighted average cost using the LIFO method. Inventories of foreign operations are primarily valued by the retail method of accounting, using the first-in, first-out (“FIFO”) method.At January 31, 2008 and 2007, our inventories valued at LIFO approximate those inventories as if they were valued at FIFO. As indicated in this note, Wal-Mart values its inventories at the lower-of-cost-or- market using LIFO and FIFO. Analysis The amount of inventory carried by a company has significant economic conse- quences. And inventory management is a double-edged sword that requires con- stant attention. On the one hand, management wants to have a great variety and quantity on hand so that customers have a wide selection and items are always in stock. But such a policy may incur high carrying costs (e.g., investment, storage, in- surance, obsolescence, and damage). On the other hand, low inventory levels lead to stockouts and lost sales. Common ratios used to manage and evaluate inventory levels are inventory turnover and a related measure, days in inventory.
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