Financial Accounting Question 4

QUESTION

4

Multiple Choice

4i) What amount will Ted calculate for ending inventory using FIFO, assuming he erroneously reports that 110 tables remain in ending inventory?

• $111,200

• $69,200

• $59,400

• $105,000

(i)What amount will Ted calculate for ending inventory and COGS using FIFO,
assuming he erroneously reports that 110 tables remain in ending inventory?

Using FIFO, we assume that the units sold first are the ones acquired first.

Transactions

Unit

Unit Price ($)

Inventory, 1/01/23

150

540

Purchase, 8/03/23

120

570

Purchase, 22/08/23

100

600

Purchase, 29/10/23

80

640

Sales, 1/01 - 31/12 2023

400

700

Ending Inventory: 110 tables remain

(80u* $640) + (30u*$600)

= $69,200

Tan Shu Ai

(i)What amount will Ted calculate for ending inventory and COGS using FIFO,
assuming he erroneously reports that 110 tables remain in ending inventory?

COGS = Beginning Inventory + Purchases - Ending Inventory

Transactions

Unit

Unit Price ($)

Inventory, 1/01/23

150

540

Purchase, 8/03/23

120

570

Purchase, 22/08/23

100

600

Purchase, 29/10/23

80

640

Sales, 1/01 - 31/12 2023

400

700

COGS:

(150u* $540) + (120u*$570) + (70u*$600)

= $191,400

Tan Shu Ai

Poll

4ii) What amount would Ted calculate for COGS using FIFO if he correctly

reports that only 50 tables remain in ending inventory?

• $260,600

• $214,400

• $228,600

(ii) What amount would Ted calculate for COGS using FIFO if he correctly

reports that only 50 tables remain in ending inventory?

Tan Shu Ai

Transactions

Unit

Unit Price ($)

Inventory, 1/01/23

150

540

Purchase, 8/03/23

120

570

Purchase, 22/08/23

100

600

Purchase, 29/10/23

80

640

Sales, 1/01 - 31/12 2023

400

700

COGS: Beginning Inventory + Purchases

(150u* $540) + (120u*$570) + (100u*$600) +
(30u*$640)

= $228,600

Ending Inventory: 50 tables remain

(50u* $640) = $32,000

Poll

4iii)  Ignoring tax effects and assume that ending inventory is correctly counted at the end of

2024, what effect will the inventory error have on reported amounts for:

Ending Inventory, Net Income, Retained Earning in 2023

• Overstated

  Overstated

  Overstated

• Understated
  Understated

  Understated

• Overstated

  Understated

  Understated

(iii) Ignoring tax effects and assume that ending inventory is correctly counted at the end of

2024, what effect will the inventory error have on reported amounts for:

2023

2024

(a) Ending Inventory

Overstated

No effect

(b) Net Income

Overstated

Understated

(c) Retained Earnings

Overstated

Understated

2023: If Ending Inventory is Overstated, the COGS will be Understated hence,

Retained Earnings and Net Income will be Overstated

Tan Shu Ai

2023 Inventory error/ Erroneous report: 110 tables remaining

Ending inventory

Net income

Retained Earnings

COGS = $81,000 (B.I) + $179,000 (Purchases) - $69,200 (E.I)

Decrease COGS by $37,200 (explained in next slide)

2024

(a) Ending Inventory

No effect

(b) Net Income

Understated

(c) Retained Earnings

Understated

Increases COGS, decrease net income by $37,200 in 2024, affecting retained earnings and

decreasing it, while ending inventory has no effect

COGS = $81,000 (B.I) + $179,000 (Purchases) - $32,000 (E.I)

If Correctlyreported Ending Inventory in 2024

Ending inventory

Net income

Retained Earnings

2024: Since Ending Inventory 2023 becomes Beginning Inventory of 2024, B.I of 2024 increases

-

= $37,200