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Chapter 8: 20Q (page 422)

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Short Answer

Expert verified

Due to the omission of inventory, net income will be overstated and the current assets will be understated. Yes, materiality is a factor while making adjustments.

Step by step solution

01

Effect on net income

The title for the goods in transit belongs to the company. Thus this value should have been included in the ending inventory and purchases.

As a result, the purchase will be understated and consequently, the COGS will also be understated.

So, the net income will be overstated.

02

Effect on the balance sheet

If the purchases have been understated, the ending inventory will also be understated. So, as a result, the current assets of the company will be understated.

03

Materiality factor

The materialistic factor is the basis of accounting. As per the accounting principle, only materialistic events should be recorded. Thus the omission of recording inventory needs adjustment in the books of accounts.

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Most popular questions from this chapter

Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.

Describe the LIFO double-extension method. Using the following information, compute the index at December 31, 2017, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is \(10.20 and of product B is \)37.00. The price at December 31, 2017, for product A is \(21.00 and for product B is \)45.60. (Round to two decimal places.)

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

Question:Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.

2016 2017 2018

Sales revenue \(290,000 \) ?$410,000

Sales returns and allowances 11,000 13,000 ?

Net sales ? 347,000 ?

Beginning inventory 20,000 32,000 ?

Ending inventory ? ? ?

Purchases ? 260,000 298,000

Purchase returns and allowances 5,000 8,000 10,000

Freight-in 8,000 9,000 12,000

Cost of goods sold 233,000 ? 293,000

Gross profi t on sales 46,000 91,000 97,000

Midori Company had ending inventory at end-of-year prices of \(100,000 at December 31, 2016; \)119,900 at December 31, 2017; and $134,560 at December 31, 2018. The year-end price indexes were 100 at 12/31/16, 110 at 12/31/17,and 116 at 12/31/18. Compute the ending inventory for Midori Company for 2016 through 2018 using the dollar-valueLIFO method.
See all solutions

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