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Chapter 6: 4RQ (page 357)
What is the goal of conservatism?
The goal of conservatism is to prevent recording any unrealistic figures into the books of accounts.
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How is inventory turnover calculated, and what does it measure?
Question:Empire State Carpets鈥檚 books show the following data. In early 2020, auditors foundthat the ending merchandise inventory for 2017 was understated by \(8,000 and thatthe ending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.
2019 | 2018 | 2017 | |
Net Sales Revenue | \( 220,000 | \) 162,000 | \( 176,000 |
Cost of Goods Sold: | |||
Beginning Merchandise Inventory | \)22,000 | \(29,000 | \)46,000 |
Net cost of purchase | 132,000 | 90,000 | 76,000 |
Cost of goods available for sale | 154,000 | 119,000 | 122,000 |
Less: Ending Merchandise Inventory | 32,000 | 22,000 | 29,000 |
Cost of goods sold | 122,000 | 97,000 | 93,000 |
Gross Profit | 98,000 | 65,000 | 83,000 |
Operating Expenses | 72,000 | 38,000 | 48,000 |
Net Income | \( 26,000 | \) 27,000 | $ 35,000 |
Requirements
1. Prepare corrected income statements for the three years.
Question:Antique Carpets鈥檚 books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by \(8,000 and that theending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.
2019 | 2018 | 2017 | |
Net Sales Revenue | \( 212,000 | \) 161,000 | \( 170,000 |
Cost of Goods Sold: | |||
Beginning Merchandise Inventory | \)22,000 | \(28,000 | \)41,000 |
Net cost of purchase | 131,000 | 100,000 | 86,000 |
Cost of goods available for sale | 153,000 | 128,000 | 127,000 |
Less: Ending Merchandise Inventory | 34,000 | 22,000 | 28,000 |
Cost of goods sold | 119,000 | 106,000 | 99,000 |
Gross Profit | 93,000 | 55,000 | 71,000 |
Operating Expenses | 63,000 | 28,000 | 39,000 |
Net Income | \( 30,000 | \) 27,000 | $ 32,000 |
Requirements
2. State whether each year鈥檚 net income鈥攂efore your corrections鈥攊s understated oroverstated, and indicate the amount of the understatement or overstatement.
Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:
May 1 Beginning merchandise inventory 16 tires @ \( 65 each
11 Purchase 10 tires @ \) 78 each
23 Sale 12 tires @ \( 88 each
26 Purchase 14 tires @ \) 80 each
29 Sale 18 tires @ $ 88 each
Requirements
4. Which method results in the largest gross profit, and why?
Some of M and C Electronics鈥檚 merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is \(24,000 below the business鈥檚 cost of the goods, which was \)97,000. Before any adjustments at the end of the period, the company鈥檚 Cost of Goods Sold account has a balance of $380,000.
Requirements
4. Which accounting principle or concept is most relevant to this situation?
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