Question

1. Identify and describe the three inventory estimation methods.

.Problem 6-10B Analysis of inventory errors

Incorrect Income Statement Information for Years Ended December 31

Corrected Income Statement Information for Years Ended December 31

	2017	%	2018	%	2017	%	2018	%
Sales
Cost of goods sold
Gross profit

In comparing income statement information for the years ended December 31, 2017, and 2018, the owner noticed an increase in the gross profit. He was puzzled because he knew that inventory costs were increasing.

A detailed review of the records showed the following:

1. Goods with a cost of $37,500 were on consignment at another location. Through an error, they were not included in the inventory of December 31, 2017.

2. $16,000 of merchandise inventory purchased on December 25, 2018, was shipped FOB Shipping Point and received on January 6, 2019. It was not included in inventory on December 31, 2018, in error.

3. While performing the physical inventory count on December 31, 2018, a calculation error was discovered that caused inventory on hand to be overstated by $24,500.

Required

1. Using the information provided, complete the schedule showing the corrected income statement information (round percentages to the nearest whole number).

2. Does the new gross profit information reflect the owner’s knowledge of increasing inventory costs?

Answer 1

Corrected Cost of g oods sold 2017:
Cost of goods sold 2017			402600
Less: Goods in stock with consignee			37500
Corrected COGS of 2017			365100
Corrected Cost of goods sold 2018:
Cost of goods sold 2018			417500
Add: Inventory in transit			16000
Less: Overstated amount of Inventory			-24500
Corrected COGS of 2018			409000
REq1.
			Corrected Income Statement
		2017	%	2018	%
Sales		671000	100%	835000	100%
Cost of goods sold		365100	54.41%	417500	50%
Gross Profit		305900	45.59%	417500	50%
No, the Gross profit percentage reflects the reducce cost of inventory purchase.