Some of M and C Electronics’s merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is $24,000 below the business’s cost of the goods, which was $97,000. Before any adjustments at the end of the period, the company’s Cost of Goods Sold account has a balance of $380,000.
4. Which accounting principle or concept is most relevant to this situation?
The principle of conservatism has been used in this situation.
In inventory accounting, there are four principles or concepts that must be followed. These are –
a) Consistency principle
b) Disclosure principle
c) Materiality concept
These principles govern inventory accounting and standards.
In the given case, the principle of conservatism has been used. As per this principle, there should be reporting of figures at the reduced value and not on overstated value.
The inventory’s realization value has been decreased by a significant amount and becomes lower than the historical cost. In this situation, for every sale, there would be a loss because the cost would be higher than the market value. So, as per the conservatism principle, this loss must be recognized to COGS and the ending inventory would be reported at a lower of cost and net realizable value.
Question: Broadway Communications reported the following figures in its annual financial statements:
Cost of Goods Sold $ 18,400
Beginning Merchandise Inventory 560
Ending Merchandise Inventory 450
Compute the rate of inventory turnover and days’ sales in inventory for BroadwayCommunications. (Round to two decimal places.)
Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of $4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:
Jan. 5 Purchase 156 crates @ $ 64 each
13 Sale 180 crates @ $ 100 each
18 Purchase 114 crates @ $ 75 each
26 Sale 150 crates @ $ 116 each
1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company’s cost of goods sold, ending merchandise inventory, and gross profit.
Question: Boston Cycles started October with 12 bicycles that cost $42 each. On October 16, Boston bought 40 bicycles at $68 each. On October 31, Boston sold 34 bicycles for$100 each.
Preparing a perpetual inventory record and journal entries—LIFO
1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses theLIFO inventory costing method.
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