financial accounting tools for business decision making 6e solution manual chapter 6

The specific identification method tracks the physical flow of individual inventory items, matching the cost of the actual item sold against the revenue from that item.. Hence, cost of g

CHAPTER 6

Reporting and Analyzing Inventory

ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises Exercises

A Problems

2 Apply the methods of

cost determination using

*16A

2B, 3B, 4B, 5B, 6B, *15B,

4 Identify the effects of

inventory errors on the

6B, 7B, 8B, 9B, 10B, 11B, 12B, *14B

1, 2, 4

*6 Apply the FIFO and

average cost inventory

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the

appendices to each chapter

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

6A Record transactions using perpetual average cost;

apply LCNRV

Moderate 30-40

7A Determine effects of inventory error for two years Moderate 20-25

11A Calculate ratios and comment on liquidity Moderate 25-30

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Difficulty Level

Time Allotted (min.)

6B Record transactions using perpetual FIFO; apply

LCNRV

Moderate 30-40

7B Determine effects of inventory error for two years Moderate 25-35

11B Calculate ratios and comment on liquidity Moderate 25-30

12B Compare ratios; comment on liquidity and profitability Moderate 25-30

*14B Prepare partial financial statements and assess

effects

Moderate 20-30

ANSWERS TO QUESTIONS

1 Taking a physical inventory involves actually counting, weighing or measuring each kind

of inventory on hand Retailers, such as hardware stores, generally have thousands of different items to count This is normally done when the store is closed to minimize errors due to the movement of merchandise Tom will probably count items and mark the quantity, description, and inventory number on pre-numbered inventory tags (unless the company has more advanced technology that can read bar codes on inventory products – we will assume that they do not) He should only include items in the inventory that are

in saleable condition

Ideally, strong internal control should be exerted over the physical inventory count For example, Tom should not have responsibility for the custody or record-keeping for the inventory He should also count in teams of two, or there should be a second counter checking the accuracy of the count

Adjustments may also have to be made to the physical inventory count for any goods in transit For example, inventory purchased FOB shipping point that is still in transit will have to be included in inventory Inventory that has been shipped by Kikujiro to customers FOB destination and not received by the customer before year-end will also have to be included in the count Finally, any of Kikujiro’s inventory held by other retailers

on consignment will have to be included in the count as well

2 Internal control consists of all the related methods and measures adopted within an organization to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations The use of internal control procedures will result in a more accurate and reliable inventory count

For example, the counting should be done by employees who do not have responsibility for the custody or record-keeping for the inventory Each counter should verify the validity of each inventory item by checking that the items actually exist, how many there are and what condition they are in To ensure accuracy, counting should be completed in teams of two and all inventory counts should be rechecked Finally pre-numbered inventory tags should be used to ensure that all inventory is counted and none is counted twice The pre-numbering of the tags will assist in the retracing of the count back to the physical inventory on hand and will also assist in establishing to the completeness of the count, when the inventory is compiled from the tags

3 (a) The goods will be included in Janine Ltd.’s (the seller’s) inventory if the terms of sale

are FOB destination

(b) The goods will be included in Fastrak Corporation’s (the buyer’s) inventory if the terms of sale are FOB shipping point

Answers to Questions (Continued)

4 (a) Include: the inventory items belong to Kingsway

(b) Include: the inventory items belong to Kingsway

(c) Exclude: the customer has purchased the inventory item and legal ownership has

passed to the customer

5 The specific identification method tracks the physical flow of individual inventory items, matching the cost of the actual item sold against the revenue from that item An example

of inventory where the specific identification would be appropriate would be for goods that are not ordinarily interchangeable, such as automobiles with unique serial numbers The FIFO inventory cost method assumes the first inventory purchased is the first inventory sold The most recent purchases are assumed to remain in ending inventory Inventory such as groceries could be accounted for using the FIFO cost method since older items should be sold first The average cost method assumes that all goods available for sale are indistinguishable or homogeneous Inventory such as hardware could be accounted for using an average cost method

6 Average assumes that the goods available for sale are identical FIFO assumes that the first goods purchased are the first to be sold Specific identification matches the actual physical flow of merchandise

7 A new weighted average unit cost must be calculated after each purchase because a new cost amount is added to the “cost pool” This changes the total dollars in the cost pool and the quantity of units on hand in the cost pool A sale withdraws units and total dollars from the cost pool at the weighted average cost This does not affect the weighted average cost of the remaining units That is, the weighted average cost of the remaining units is unchanged after a sale

8 A company should consider:

• Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects;

• Whether the method corresponds most closely to the physical flow of goods;

• Whether the method reports inventory on the statement of financial position that is close to the inventory’s most recent cost; and

• Whether the method is used for other inventories with a similar nature and usage

9 Average produces the better income statement valuation because the cost of goods sold

is determined using more recent inventory prices This better matches current costs with current revenues

FIFO produces the better valuation on the statement of financial position because the ending inventory is determined using the most recent prices Since the normal intent is to replace the inventory after it is sold, the most recent prices are more relevant for decision-making

Answers to Questions (Continued)

10 (a) No effect – cash is not affected by the choice of inventory cost methods

(b) In a period of declining prices, FIFO will produce a lower ending inventory as inventory is determined using the most recent (lower) prices Average will produce a higher ending inventory as ending inventory incorporates the higher older prices (c) The cost of goods sold effect is opposite to that of ending inventory Hence, cost of goods sold will be higher under FIFO and lower under the average cost method (d) Because of the effect on the cost of goods sold as outlined in (c), profit will be lower under FIFO and higher under average

(e) The impact on retained earnings will be the same as the impact on profit and ending inventory—lower in a period of declining prices using FIFO and higher using average cost

11 The error should be corrected if it will change the figures presented on the financial statements While retained earnings may not change, other financial statement items and comparative figures may change This information may impact a user’s decision

12 (a) Mila Ltd.’s 2014 profit will be understated by $5,000 This is because an

understatement of ending inventory will result in an overstatement of cost of goods sold If cost of goods sold is overstated, then profit will be understated

(b) 2014 retained earnings will be understated by $5,000 because profit is understated (see (a) above)

(c) 2014 total shareholders’ equity will be understated by $5,000 because the retained earnings balance is understated (see (b) above)

(d) 2015 profit will be overstated $5,000 This is because beginning inventory is understated by $5,000, which will result in an understatement of cost of goods sold (recognizing that 2014 ending inventory is 2015 beginning inventory) If cost of goods sold is understated, then profit will be overstated

(e) 2015 retained earnings will be correct because the understatement in profit in 2014 and overstatement in 2015 will cancel each other

(f) 2015 total shareholders’ equity will be correct because the retained earnings balance is correct

Answers to Questions (Continued)

13 (a) At the end of the fiscal year, before the inventory is adjusted to the inventory count,

Shediac’s assets (Merchandise Inventory) would be overstated and its liabilities would be overstated (Accounts Payable) There would be no effect on shareholders’ equity

(b) Since the merchandise is not on hand at the time of the inventory count, the shipment from Bathurst would not be counted This in turn would cause the inventory count to be lower than the perpetual inventory record Normally when such a discrepancy arises, the Inventory account will be adjusted downward with a credit to reflect the amount of merchandise actually on hand The corresponding debit in this adjusting entry would be to Cost of Goods Sold The summary effect of the initial error and the count adjustment would be an overstatement in Cost of Goods Sold and Accounts Payable

Because Cost of Goods Sold is overstated, gross profit and profit are understated as well as Retained Earnings At the end of Shediac’s current year, after the adjustment

is made for the results of the inventory count, the overall impact on the accounting equation is no effect on assets, an overstatement of liabilities (Accounts Payable), and an understatement of shareholders’ equity (Retained Earnings)

14 (a) Cost refers to the original cost of inventory as determined by using specific

identification, or the FIFO or average cost methods

(b) Net realizable value is the selling price less any costs required to make the goods ready for sale

(c) The lower of cost and net realizable value rule should be applied at the end of the accounting period, before financial statements are prepared

15 Cost of Goods Sold is debited when recording a decline in inventory value under the lower of cost and net realizable value rule because a decline in the value of inventory is considered to be a cost of buying and selling merchandise These declines are usually considered part of the risk associated with carrying inventory and part of the costs of carrying a variety and quantity of goods on hand

16 An increase in the days in inventory ratio from one year to the next would be seen as deterioration in the company’s efficiency in managing inventory It means that the inventory is being held for a longer period of time, which increases the risk of spoilage and obsolescence

Answers to Questions (Continued)

17 (a) An inventory turnover ratio that is too high may indicate that the company is losing

sales opportunities because of inventory shortages Inventory shortages may also cause customer ill will and result in lost future sales

(b) If the inventory turnover is too low, it may indicate that the company is having difficulty selling its inventory and the inventory may become obsolete

*18 Periodic and perpetual inventory systems differ in the accounting treatment for inventories Under a perpetual inventory system inventory records are updated for every purchase and sale transaction The cost of goods sold is recorded each time a sale is made Under a periodic system, the inventory is only updated at the end of the period when a physical inventory count is performed Inventory purchases throughout the year are debited to a Purchases account in a periodic inventory system rather than a Merchandise Inventory account When a sale is recorded in a periodic inventory system,

no entry is made to record the cost of the sale Cost of goods sold is calculated separately after the physical inventory count is performed

*19 Ending inventory is known as a result of the physical inventory count To determine cost

of goods sold, the total amount of inventory available for sale needs to be determined first in order to determine what inventory has been sold (goods available for sale – ending inventory = cost of goods sold) Goods sold are not tracked separately in a periodic inventory system

*20 In both systems, the first costs in are the costs assigned to the goods sold so no matter what system is used, the cost of goods sold will always consist of the oldest units and these would are assumed to be on hand when using either method

*21 In a perpetual system, the average cost per item is recalculated every time a purchase transaction takes place In a periodic system, the average is determined based on the total goods available for sale during the period If there are cost changes during the period, the average cost per item will differ in a perpetual and periodic inventory system

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1

(a) Ownership of the goods belongs to the consignor (Helgeson) Thus, these goods should

be included in Helgeson’s inventory

(b) Goods held on consignment belong to the other company and should not be included in Helgeson’s inventory

(c) The goods in transit belong to the customer as the terms of shipment are FOB shipping point They should not be included in Helgeson’s inventory because title transferred to the customer as soon as the goods were shipped

(d) The goods in transit should not be included in the inventory count because ownership by Helgeson does not occur until the goods reach the buyer

(e) The goods in transit belong to Helgeson because ownership does not transfer until the customer receives the goods They should be included in Helgeson’s inventory

(f) The goods purchased belong to the buyer, Helgeson as the terms of shipment are FOB shipping point Title transferred to Helgeson as soon as the goods were shipped so even though they have not been received they should be included in Helgeson’s inventory

BRIEF EXERCISE 6-2

$66,000 Count

(6,000) Held on consignment

(1,000) Sold

4,000 August 28 shipment plus freight, FOB shipping point ($3,750 + $250)

$63,000 Correct inventory cost

(a) Specific Identification 2 pianos @ $600 = $1,200

1 piano @ $475 = 475

$1,675

$2,750 – $1,675 = $1,075

(Proof: 1 piano @ $600 + 1 piano @ $475 = $1,075)

(b) If management wished higher profit, it could have sold two pianos from the last shipment that had a lower cost If it wished lower profit, it could have sold the first two pianos purchased

BRIEF EXERCISE 6-6

(a) FIFO cost method

Check: $5,500 + $12,050 = $17,550

(b) Average cost method

BRIEF EXERCISE 6-7

(a) Average The ending inventory is valued at the average of the cost of the product, including earlier costs Since this method yields a higher ending inventory than average cost when prices are falling, the result will not be closer to replacement cost This result

is achieved with the FIFO cost method

(b) FIFO The cost of goods is valued using the earlier, higher costs Since the revenue reflects current lower prices, the FIFO cost method does not match current costs against revenue when prices are falling This result is better achieved by the average cost method

(c) One of the guidelines that management should consider is choosing an inventory cost method that corresponds as closely to the physical flow of goods as possible A cost method that provides an ending inventory cost close to the inventory’s recent cost is also preferable

BRIEF EXERCISE 6-8

Total assets in the statement of financial position will be overstated by the amount that ending inventory is overstated, $25,000 When the purchase of inventory was recorded, an account payable would have been created, so total liabilities will also be overstated by

$25,000 (assuming the “supplier” was not paid) Shareholders’ equity will not be affected

In the following year, assuming that these goods are sold, their cost is zero so cost of goods sold would be understated and profit overstated Assuming that there are no errors when counting inventory at the end of next year, this profit overstatement when combined with the previous year profit understatement, would cancel each other out and make retained earnings correctly stated at the end of next year

These effects are summarized below

Shareholders’ equity Understated $7,000 No impact

3655.4 = 68 days

Inventory Turnover (2011)

$7,326($1,449 + $933) ÷ 2= 6.2 times Days in Inventory (2011)

365 6.2 = 59 days

(b) The inventory management deteriorated in 2012 as evidenced by the increase in number of days in inventory from 59 days in 2011 to 68 days in 2012 This was corroborated by the declining inventory turnover This deterioration signifies that the inventory was sold more slowly

Ending inventory: (600 units @ $11) = $6,600

Cost of goods sold = Goods available for sale – ending inventory

$20,530 – $6,600 = $ 13,930

Proof: Cost of goods sold = (370 × $9) + ( 700 × $12) + (200 x $11) = $ 13,930

(b) Average

Note: Unrounded numbers have been used in the average cost calculations, although the

numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

Weighted average cost = $20,530 ÷ 1,870 = $10.98

*BRIEF EXERCISE 6-14

(a) Ending Inventory: (13 × $4.50) + (2 × $5.00) = $68.50

Cost of goods sold = Goods available for sale – ending inventory

$216.00 – $68.50 = $147.50

Proof: Cost of goods sold = (15 × $4.50) + (16 × $5.00) = $147.50

(b) No, the answer under a perpetual system would be the same as the first goods purchased are assumed to be the first goods sold

(c)

Cost of Goods Sold 25

Merchandise Inventory 25

5 × $5.00 = $25

*BRIEF EXERCISE 6-15

(a) FIFO Perpetual

Jan 3 Accounts Receivable 3,000

Jan 3 Accounts Receivable 3,000

SOLUTIONS TO EXERCISES

EXERCISE 6-1

1 Do not include – Shippers Ltd does not own items held on consignment

2 Include in inventory – Shippers Ltd still owns the items as they were only shipped on consignment

3 Include in inventory – Shipping terms FOB destination means that Shippers Ltd owns the items until they reach the customer

4 Do not include in inventory Freight costs on goods shipped to customers are included in Freight Out or Delivery Expense

5 Do not include in inventory – The shipping terms are FOB shipping point so ownership has transferred to the customer Shippers Ltd should record this as a sale on the income statement

6 Do not include in inventory The shipping terms are FOB destination so Shippers Ltd does not own the goods until they arrive at Shippers Ltd.’s premises

7 Include in inventory – Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Shippers Ltd owns the goods in transit

EXERCISE 6-2

(a) Ending inventoryphysical count $285,000

1 Add to inventory Title remains with Novotna until purchaser

receives goods 35,000

2 Add to inventory Title passed to Novotna when goods were shipped 95,000

3 Add to inventory Title passed to Novotna when goods were shipped 28,000

4 No effect Title passes to purchaser upon shipment when terms are

FOB shipping point 0

5 Add to inventory Novotna owns the goods out on consignment 30,500

6 Deduct from inventory Obsolete inventory should be written off to

cost of goods sold (15,000) Correct inventory $458,500 (b) Since inventory is usually the largest current asset on a company’s statement of financial position, errors can have a significant impact In making a decision to grant a short-term bank loan, the bank will be looking at Novotna’s liquidity by calculating the current ratio

as well as the inventory turnover and days sales in inventory Any error in the inventory count will affect these ratios In addition, the errors will also affect Novotna’s profitability

by impacting the cost of goods sold on the income statement

EXERCISE 6-3

(a) The company would identify, by serial number, the items remaining in inventory The sum of the cost of the items remaining in inventory would become the ending inventory balance Then, the company would identify the cost of the items sold, again by using serial numbers to determine the cost of each item sold The total cost of items sold would become the cost of goods sold

(b) It could choose to sell specific units purchased at specific costs if it wished to impact profit selectively If it wished to minimize profit it would choose to sell the units purchased

at higher costs–in which case the cost of goods sold would be $1,540 ($800 + $740) and gross profit would be $1,060 ($2,600 – $1,540) If it wished to maximize profit it would choose to sell the units purchased at lower costs; in which case the cost of goods sold would be $1,420 ($740 + $680) and gross profit would be $1,180 ($2,600 – $1,420)

(c) Discount Electronics should consider the nature of the inventory items The specific identification system is best suited to inventory items are clearly identified from each other and that are not ordinarily interchangeable, or to products that are produced and

segregated for specific projects The specific identification system produces the most

accurate measure of ending inventory and matching of cost of goods sold to sales It is however more time-consuming and expensive to apply If the inventory items are interchangeable, Discount Electronics should consider the use of either the FIFO or average cost flow methods

EXERCISE 6-4

(a)

Apr 1 Beg inventory

Gross profit margin = $71,250 ÷ $210,000 = 33.9%

(c) The gross profit is higher than if the average cost method had been used in a perpetual inventory system because cost of goods sold is lower under FIFO in a period of rising prices than it would be using the average cost method Under FIFO, ending inventory is higher, cost of goods sold is lower and gross profit is higher

EXERCISE 6-5

(a) Note: Unrounded numbers have been used in the average cost calculations, although the

numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

Date Description Purchases Cost of Goods Sold Ending Inventory

Gross profit margin = $197,500 ÷ $528,000 = 37.4%

(c) The gross profit is lower than it would be using the FIFO cost method because the cost of the product being purchased is rising

EXERCISE 6-6

(a) (1) FIFO

Check: $5,210 + $1,270 = $6,480 ($750 + $5,730)

(a) (2) Average

Note: Unrounded numbers have been used in the average cost calculations, although the

numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

(a) FIFO cost method

(b) Average cost method

Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Oct 2 9,000 $12 $108,000 9,000 $12.00 $108,000

EXERCISE 6-7 (Continued)

(d) (1) Currently, as shown in (a) above, FIFO results in a higher profit than the average

cost method This is anticipated when costs are rising, as is the case above

If instead costs fall, the use of the FIFO cost method will result in a lower profit compared to the average cost method The cost of goods sold will then be composed of higher costs than the average cost method and this will generate lower profits

(2) If costs remain stable, the two cost methods will produce the same profits

The $2,000 overstatement of inventory in 2015 will cause the cost of goods sold to be understated and the profit and retained earnings to be overstated by $2,000

When the two errors are taken together, in 2015 cost of goods sold will be understated

by $6,000 ($4,000 for 2014 error and $2,000 for 2015 error) Profit will be overstated by

(4) The errors will not affect liabilities

(5) As explained above in (1) and (2), retained earnings is understated by $4,000 in

2014 In 2015, retained earnings is overstated by $2,000 Because of this, shareholders’ equity will be understated by $4,000 in 2014 and overstated by $2,000

EXERCISE 6-9

(a)

Sales $265,000 $250,000 Cost of goods sold (see 1 and 2) 213,000 186,000 Gross profit $ 52,000 $ 64,000 (1) $194,000 – $8,000 = $186,000

(2) $205,000 + $8,000 = $213,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below:

Incorrect gross profits: $56,000 + $60,000 = $116,000

Correct gross profits: $64,000 + $52,000 = 116,000

EXERCISE 6-10

Units Cost/Unit Total Cost NRV/Unit Total NRV

(a) LCNRV Cameras:

EXERCISE 6-11

(a)

Inventory Turnover (2012):

$1,552,128($553,068 + $568,311)÷2= 2.8 times

Days in Inventory (2012):

3652.8 = 130 days Gross Profit Margin (2012):

($1,948,253 - $1,552,128)

Inventory Turnover (2011):

$1,288,106($568,311 + $332,542)÷2= 2.9 times Days in Inventory (2011):

3652.9 = 126 days Gross Profit Margin (2011):

($1,725,712 - $1,288,106)

(b) In 2012, Gildan Activewear experienced a deterioration in liquidity and profitability The liquidity has been deteriorated due to the increase in time required to turn over its inventory, from 126 days to 130 days The company has experienced deteriorated profitability due to a significant drop in its gross profit margin from 25.4% to 20.3%

*EXERCISE 6-13

(a)

FIFO Beginning inventory (30 × $10) $ 300

Purchases

May 12 (50 × $12) $600

May 14 (20 × $15) 300 900

Cost of goods available for sale (100 units) 1,200

Less: Ending inventory (15 × $15) 225

Cost of goods sold (85 units) $ 975

(b)

Average Beginning inventory (30 × $10) $ 300

Purchases

May 12 (50 × $12) $600

May 14 (20 × $15) 300 900

Cost of goods available for sale (100 units) 1,200

Less: Ending inventory (15 × $12*) 180

Cost of goods sold (85 units) $1,020

*$1,200 ÷ 100 units = $12/unit

*EXERCISE 6-14

(a)

(1) FIFO

Beginning inventory (150 × $5) $ 750 Purchases

June 12 (230 × $6) $1,380

June 16 (450 × $7) 3,150

June 23 (150 × $8) 1,200 5,730 Cost of goods available for sale (980 units) 6,480 Less: Ending inventory [(150 × $8) + (75 × $7)] 1,725 Cost of goods sold $4,755

(2) Average

Note: Unrounded numbers have been used in the average cost calculation, although the

numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

Cost of Goods Total Units Weighted Average Available for Sale ÷ Available for Sale = Unit Cost $6,480 980 $6.61

(c) (1) FIFO – The perpetual system will give the same ending inventory and cost of goods

sold as the periodic system

(2) Average – The perpetual system will have a different ending inventory and cost of goods sold because the cost of goods sold is calculated based on the weighted average at the time of each sale under the perpetual system

*EXERCISE 6-15

(a) (1) FIFO

*EXERCISE 6-15 (Continued)

(a) (2) Average

Note: Unrounded numbers have been used in the average cost calculations, although

the numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

Nov 5 (25 × $300) $ 7,500

Nov 19 (40 × $305) 12,200

Nov 25 (30 × $310) 9,300 29,000 Cost of goods available for sale (125 units) 37,850 Less: Ending inventory (3 × $305) + (30 × $310) 10,215 Cost of goods sold $27,635

AVERAGE Cost of goods available for sale (125 units) $37,850.00 Less: Ending inventory (33 × $302.801) 9,992.40 Cost of goods sold $27,857.60

1

$37,850 ÷ 125 = $302.80

Unit

Cost/ Unit

Sales Ltd because the vehicles are large dollar value items that are specifically identifiable by serial number

PROBLEM 6-2A

(a)

Apr 1 Beg inventory

(b) It needs to consider whether the change will result in more relevant and reliable

presentation in the financial statements This may only occur if the physical flow, or nature and use, of the inventory changes

(c) I would expect the ending inventory under the average cost method to be higher when

prices are falling as the inventory will be valued at an average cost Under FIFO, ending inventory would be lower when prices are falling as the inventory will be valued

at the last (and lowest) price Cost of goods sold under the average cost method would be lower

PROBLEM 6-3A

(a) Note: Unrounded numbers have been used in the average cost calculations, although

the numbers have been rounded to the nearest cent for presentation purposes Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation

48.33 483.33

(c) Three accounts would be affected—Merchandise Inventory, Cost of Goods Sold, and

Retained Earnings The Merchandise Inventory account would be overstated by

$36.56 This would result in the statement of financial position sub-totals of current assets and total assets also being overstated The Cost of Goods Sold account would

be understated by $36.56 This would lead to the income statement sub-totals of gross profit and profit being overstated by $36.56 The Retained Earnings account would also be overstated by $36.56

PROBLEM 6-4A