Question

Jason Tierro, an inventory clerk at Lexmar Company, is responsible for taking a physical count of the goods on hand at the end of the year. He has been performing this duty for several years. This year, Jason was very busy due to a shortage of personnel at the company, so he decided to just estimate the amount of ending inventory instead of doing an accurate count. He reasoned that he could come very close to the true amount because of his past experience working with inventory. Besides, he was sure that the sophisticated computer program that Lexmar had just invested in kept an accurate record of inventory on hand.

1. What is your opinion of Jason’s reasoning?

2. If Jason underestimates the dollar amount of ending inventory, what effect will it have on net income for the current accounting period?

Answer 1

Requirement 1

Physical count cannot be substituted by any other technique. The very determination of physical count is to confirm that book inventory equals physical one. Physical inventory taking certify that inventory shown on balance sheet is in fact there. For example, pilferage of inventory can't be wedged by any other technique however decent it is.

Requirement 2

If Jason underrates the dollar amount of the ending inventory, this might be terrible for the company. If he were to miscalculate this would mean that Net income will be minimalist as cost of production will increase.