12 importance of inventories 12 importance of

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1.2 IMPORTANCE OF INVENTORIES1.2 IMPORTANCE OF INVENTORIESMerchandise purchased and sold is the most active elements in merchandising business, i.e. inMerchandise purchased and sold is the most active elements in merchandising business, i.e. inwholesale and retail type of businesses. This is due to the following reasons:wholesale and retail type of businesses. This is due to the following reasons:1.The sale of merchandise is the principal source of revenue for them.1.The sale of merchandise is the principal source of revenue for them.2.The cost of merchandise sold is the largest deductions from sales.2.The cost of merchandise sold is the largest deductions from sales.3.Inventories (ending inventories) are the largest of the current assets or those firms.3.Inventories (ending inventories) are the largest of the current assets or those firms.Because of the above reasons inventories, have effects on the current and the followingBecause of the above reasons inventories, have effects on the current and the followingperiod’s financial statements. If inventories are misstated (understated of overstated), theperiod’s financial statements. If inventories are misstated (understated of overstated), thefinancial statements will be distorted.financial statements will be distorted.1.3 THE EFFECTS OF INVENTORIES ON CURRENT AND FOLLOWING1.3 THE EFFECTS OF INVENTORIES ON CURRENT AND FOLLOWINGPERIOD’S FINANCIAL STATEMENTSPERIOD’S FINANCIAL STATEMENTS.1.3.1 Effect of ending inventory on current period’s financial statements1.3.1 Effect of ending inventory on current period’s financial statementsEnding inventory is the cost of merchandise on hand at the end of accounting period. Let usEnding inventory is the cost of merchandise on hand at the end of accounting period. Let ussee its effect on current period’s financial statements.see its effect on current period’s financial statements.1
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Chapter 25 / Exercise 6
College Accounting, Chapters 1-27
Heintz/Parry
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Income statementIncome statementa.a.Cost of goods (merchandise) sold =Beginning inventory + NetCost of goods (merchandise) sold =Beginning inventory + Netpurchase – Ending inventorypurchase – Ending inventoryAs you see, ending inventory is a deduction in calculation cost of merchandise sold. So, it hasAs you see, ending inventory is a deduction in calculation cost of merchandise sold. So, it hasan indirect (negative) relationship to cost of merchandise sold, i.e. if ending inventory isan indirect (negative) relationship to cost of merchandise sold, i.e. if ending inventory isunderstated, the cost of merchandise sold will be overstated, and if ending inventory isunderstated, the cost of merchandise sold will be overstated, and if ending inventory isoverstated, the cost of merchandise sold will be understated.overstated, the cost of merchandise sold will be understated.

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Term
Spring
Professor
Dr. Laximikantam
Tags
Depreciation, retail price, Br
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
College Accounting, Chapters 1-27
The document you are viewing contains questions related to this textbook.
Chapter 25 / Exercise 6
College Accounting, Chapters 1-27
Heintz/Parry
Expert Verified

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