Page 321 - Accounting Principles (A Business Perspective)

7. Measuring and reporting inventories

Transportation -in $204,000
Sales $3,720,000
The company was fully covered by insurance and asks you to determine the amount of its claim for loss of

merchandise.
Exercise S Victoria Falls Company, Inc., records show the following account balances for the year ending 2010
December 31:
Cost Retail
Beginning inventory USD 42,000 USD 57,500

Purchases 25000 37500
Transportation-in 500
Sales 52500

Using these data, compute the estimated cost of ending inventory using the retail method of inventory valuation.
Problems

Problem A Kelley Company reported net income of USD 358,050 for 2009, USD 371,400 for 2010, and USD
325,800 for 2011, using the incorrect inventory amounts shown for 2009 December 31, and 2010. Recently, Kelley
corrected the inventory amounts for those dates. Kelley used the correct 2011 December 31, inventory amount in
calculating 2011 net income.

Incorrect Correct
2009 December 31 USD 72,600 USD 86,200
2010 December 31 84000 70200

Prepare a schedule that shows: (a) the reported net income for each year, (b) the amount of correction needed
for each year, and (c) the correct net income for each year.
Problem B An examination of the financial records of Lanal Company on 2009 December 31, disclosed the

following with regard to merchandise inventory for 2009 and prior years:
2005 December 31, inventory was correct.
2006 December 31, inventory was overstated USD 200,000.
2007 December 31, inventory was overstated USD 100,000.
2081 December 31, inventory was understated USD 220,000.
2009 December 31, inventory was correct.
The reported net income for each year was:
2006 $384,000
2007 544,000
2008 670,000
2009 846,000
a. Prepare a schedule of corrected net income for each of the four years, 2006-2009.
b. What error(s) would have been included in each December 31 balance sheet? Assume each year's error is
independent of the other years' errors.
c. Comment on the implications of your corrected net income as contrasted with reported net income.

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