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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

A friend of yours recently opened Abracadabra, a sportswear shop specializing in monogrammed athletic gear. Most merchandise is special ordered for customers. However, a small inventory is on hand. Your friend does not understand why a physical inventory is necessary before preparing the financial statements. She knows how much she paid for all merchandise purchased. Why not simply use this amount for cost of goods sold? After all, it has been paid for. Write a brief memo explaining the purpose of the physical inventory and why she should not use the cost of purchases as cost of goods sold.

To determine

Write a memo explaining the purpose of the physical inventory and state the reason for which the cost of purchases should not be recorded as cost of goods sold.

Explanation

Memo is prepared as follows:

Memo

From

ABC

To

Person A

Re:  Purpose of physical inventory and the reason for which the cost of purchases should not be used as cost of goods sold.

Person A,

Physical inventory helps in identifying the amount of inventory not sold even though the amount paid for purchase of inventory can be easily calculated. It is essential to divide the amounts of goods sold and amount of goods not sold...

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