Beruflich Dokumente
Kultur Dokumente
Chapter 2
Accounting For Inventories
2.1. Importance of Inventories
Definition
INVENTORIES are:
Merchandise held for sale (Merchandise Inventory)
Materials in process of production (WIP-Inventory) or
Materials held for production purpose (Raw Materials Inventory). (for Manufacturing)
Assumption 1
Ending Inventory is correctly stated at Br 220,000
Income Statement
BB Company
Income Statement
For the year ended December 31, Year I
Net Br 450,000
Sales…………………………………………………………........
Less: Cost Goods
Sold………………………………………………..
Beginning 75,000
Inventory………………………………………..
Net 420,000
Purchases…………………………………………........
CMAS…………………………………………………… 495,000
…
Less: Ending (220,000)
Inventory…………………………………….
Cost of Goods (275,000)
Sold………………………………………...
Gross 175,000
Profit…………………………………………………………...
Less: Operating (135,000)
Expenses…………………………………………….
Net Br 40,000
Income……………………………………………………………
Balance Sheet
BB Company
Balance Sheet
December 31, Year I
Merchandise Inventory.................................. 220,000 Liabilities........................ 225,000
Other Assets................................................... 310,000 Capital............................. 305,000
Total Assets.................................................... 530,000 Liabilities and OE........... 530,000
Assumption 2
Ending Inventory is incorrectly stated as Br 210,000 (Understated by Br 10,000)
Income Statement
BB Company
Income Statement
For the year ended December 31, Year I
Net Br 450,000
Sales………………………………………………………..
Less: Cost Goods
Sold…………………………………………
Page 2 of 15 By: Tewodros Endale
Principles of Accounting II
Beginning Inventory……………….. 75,000
………………..
Net Purchases………………..……………….. 420,000
……...
CMAS……………………………………………… 495,000
..
Less: Ending (210,000)
Inventory………………………………
Cost of Goods (285,000)
Sold………………………………….
Gross 165,000
Profit……………………………………………………..
Less: Operating (135,000)
Expenses………………………………………
Net Br 30,000
Income……………………………………………………...
Balance Sheet
BB Company
Balance Sheet
December 31, Year I
Merchandise Inventory.................................. 210,000 Liabilities........................ 225,000
Other Assets...................................................
310,000 Capital............................. 295,000
Total Assets....................................................
520,000 Liabilities and OE........... 520,000
The understatement or overstatement of ending inventory does not only affect the financial
statement of one accounting period but also the financial statement of the subsequent period.
Page 4 of 15 By: Tewodros Endale
Principles of Accounting II
Class Work 1
The effect of an error in the determination of Ending Inventory in year I will have the following
impact on the financial statements of the subsequent accounting period. You are given the
following data for Year II:
Net Sales for Year II.................................................. Br 600,000
Net Purchases............................................................. 375,000
Ending Inventory........................................................ 150,000
Operating Expenses.................................................... 105,000
Other Assets (December 31, Year II)......................... 300,000
Total Liabilities (December 31, Year II).................... 110,000
Instruction: Prepare Income statement and balance sheet assuming that ending inventory of year
I are reported under the three assumptions above for BB Company
1. Beginning Inventory is Correctly Stated at Br 220,000
2. Beginning Inventory is incorrectly stated Br 210,000
3. Beginning Inventory is incorrectly stated at Br 225,000
Assumption 1
Beginning Inventory is correctly stated as Br 220,000
Income Statement
BB Company
Income Statement
For the year ended December 31, Year II
Net Sales.............................................................. Br 600,000
Less: Cost Goods Sold........................................
Beginning Inventory........................... 220,000
Net Purchases..................................... 375,000
CMAS................................................ 595,000
Less: Ending Inventory....................... (150,000)
Cost of Goods Sold............................. (445,000)
Gross Profit.......................................................... 155,000
Less: Operating Expenses.................................... (105,000)
Net Income.......................................................... Br 50,000
Balance Sheet
BB Company
Balance Sheet
December 31, Year II
Merchandise Inventory........................................150,000 Liabilities........................... 110,000
Other Assets........................................................300,000 Capital................................ 340,000
Total Assets.........................................................450,000 Liabilities and OE.............. 450,000
Assumption 2
Beginning Inventory is incorrectly stated at Br 210,000
Income Statement
BB Company
Income Statement
For the year ended December 31, Year II
Net Sales.............................................................. Br 600,000
Less: Cost Goods Sold........................................
Beginning Inventory........................... 210,000
Net Purchases..................................... 375,000
Page 5 of 15 By: Tewodros Endale
Principles of Accounting II
CMAS................................................ 585,000
Less: Ending Inventory....................... (150,000)
Cost of Goods Sold............................. (435,000)
Gross Profit.......................................................... 165,000
Less: Operating Expenses.................................... (105,000)
Net Income.......................................................... Br 60,000
Balance Sheet
BB Company
Balance Sheet
December 31, Year II
Merchandise Inventory........................................150,000 Liabilities........................... 110,000
Other Assets........................................................300,000 Capital................................ 340,000
Total Assets.........................................................450,000 Liabilities and OE.............. 450,000
The effects of understating Beginning Inventory by Br 10,000, on the income statement, were as
follows:
It understates CMAS by Br 10,000
It understates Cost of Goods Sold by Br 10,000
It overstates Gross Profit by the Same amount Br 10,000
It overstates Net Income by Br 10,000 or understates net loss by the same amount
Assumption 3
Beginning Inventory is incorrectly stated at Br 225,000
Income Statement
BB Company
Income Statement
For the year ended December 31, Year II
Net Sales.............................................................. Br 600,000
Less: Cost Goods Sold........................................
Beginning Inventory........................... 225,000
Net Purchases..................................... 375,000
CMAS................................................ 600,000
Less: Ending Inventory....................... (150,000)
Cost of Goods Sold............................. (450,000)
Gross Profit.......................................................... 150,000
Less: Operating Expenses.................................... (105,000)
Net Income.......................................................... Br 45,000
Balance Sheet
BB Company
Balance Sheet
December 31, Year II
Merchandise Inventory..................................
150,000 Liabilities........................ 110,000