uring year 3, Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: Year 1 - P 60,000 understated Year 2 - P 75,000 overstated Paul uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, Paul’s retained earnings at January 1, year 3, would be P 75,000 overstated P 135,000 overstated P 15,000 overstated

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.