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Inventory Valuation and Ethics Mary Cravens is an accountant for City Appliance Corporation. One of Mary’s responsibilities is developing the ending inventory amount for the calculation of cost of goods sold each month. At the end of September, Mary noticed that the ending inventory for a new brand of televisions was much larger than she had expected. In fact, there had been hardly any change since the end of the previous month when the shipments of televisions arrived. Mary knew that the firm’s advertising had featured the new brand’s products, so she had expected that a substantial portion of the televisions would have been sold. Â Because of these concerns, Mary went to the warehouse to make sure the numbers were correct. While at the warehouse, Mary noticed that 30 of the televisions in question were on the loading dock for delivery to customers, and another, larger group of 200 sets were in an area set aside for sales returns. Mary asked Barry Tompkins, the returns supervisor, why so many of the televisions had been returned. Barry said that the manufacturer had used a cheap circuit board that failed on many of the sets after they had been in service for a week or two. Mary then asked how the defective televisions had been treated when the inventory was taken at the end of September. Barry said that the warehouse staff had been told to include in the ending inventory any item in the warehouse that was not marked for shipment to customers. Therefore, all returned merchandise was considered part of ending inventory. Mary asked Barry what would be done with the defective sets. Barry said that they would probably have to be sold to a liquidator for a few cents on the dollar. Mary knew from her examination of the inventory data that all the returned sets had been included in the September inventory at their original cost. Mary returned to the office and prepared a revised estimate of ending inventory using the information Barry Tompkins had given her to revalue the ending inventory of the television sets. She submitted the revision along with an explanatory note to her boss, Susan Grant. A few days later, Susan stopped by Mary’s office to report on a conversation with the chief financial officer, Herb Cobb. Herb told Susan that the original ending inventory amount would not be revised. Herb said that the television sets in question had been purchased by his brother and adequate documentation existed to support the sale. Required: Â What would happen to cost of goods sold, gross margin, income from operations, and net income if the cost of the returned inventory had been reduced to its liquidation price as Mary had proposed?

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881
BuyFind

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881

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Chapter
Section
Chapter 6, Problem 74.1C
Textbook Problem

Inventory Valuation and Ethics

Mary Cravens is an accountant for City Appliance Corporation. One of Mary’s responsibilities is developing the ending inventory amount for the calculation of cost of goods sold each month. At the end of September, Mary noticed that the ending inventory for a new brand of televisions was much larger than she had expected. In fact, there had been hardly any change since the end of the previous month when the shipments of televisions arrived. Mary knew that the firm’s advertising had featured the new brand’s products, so she had expected that a substantial portion of the televisions would have been sold.

 Because of these concerns, Mary went to the warehouse to make sure the numbers were correct. While at the warehouse, Mary noticed that 30 of the televisions in question were on the loading dock for delivery to customers, and another, larger group of 200 sets were in an area set aside for sales returns. Mary asked Barry Tompkins, the returns supervisor, why so many of the televisions had been returned. Barry said that the manufacturer had used a cheap circuit board that failed on many of the sets after they had been in service for a week or two. Mary then asked how the defective televisions had been treated when the inventory was taken at the end of September. Barry said that the warehouse staff had been told to include in the ending inventory any item in the warehouse that was not marked for shipment to customers. Therefore, all returned merchandise was considered part of ending inventory.

Mary asked Barry what would be done with the defective sets. Barry said that they would probably have to be sold to a liquidator for a few cents on the dollar. Mary knew from her examination of the inventory data that all the returned sets had been included in the September inventory at their original cost.

Mary returned to the office and prepared a revised estimate of ending inventory using the information Barry Tompkins had given her to revalue the ending inventory of the television sets. She submitted the revision along with an explanatory note to her boss, Susan Grant. A few days later, Susan stopped by Mary’s office to report on a conversation with the chief financial officer, Herb Cobb. Herb told Susan that the original ending inventory amount would not be revised. Herb said that the television sets in question had been purchased by his brother and adequate documentation existed to support the sale.

Required:  

What would happen to cost of goods sold, gross margin, income from operations, and net income if the cost of the returned inventory had been reduced to its liquidation price as Mary had proposed?

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Chapter 6 Solutions

Cornerstones of Financial Accounting
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Ch. 6 - Why do sales transactions under a perpetual...Ch. 6 - Why do the four inventory costing methods produce...Ch. 6 - The costs of which units of inventory (oldest or...Ch. 6 - If inventory prices are rising, which inventory...Ch. 6 - How would reported income differ if LIFO rather...Ch. 6 - How would the balance sheet accounts be affected...Ch. 6 - Why are inventories written down to the lower of...Ch. 6 - What is the effect on the current period income...Ch. 6 - What do the gross profit and inventory turnover...Ch. 6 - What is the LIFO reserve, and when is it used?Ch. 6 - How does an error in the determination of ending...Ch. 6 - ( Appendix 6A) What accounts are used to record...Ch. 6 - ( Appendix 6B) For each inventory costing method,...Ch. 6 - If beginning inventory is $20,000, purchases are...Ch. 6 - Which of the following transactions would not...Ch. 6 - Briggs Company purchased $15,000 of inventory on...Ch. 6 - Which of the following transactions would not...Ch. 6 - U-Save Automotive Group purchased 10 vehicles...Ch. 6 - Refer to the information for Morgan Inc. above. 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If...Ch. 6 - When purchase prices are rising, which of the...Ch. 6 - Which method results in a more realistic amount...Ch. 6 - Which of the following statements regarding the...Ch. 6 - Which of the following statements is true with...Ch. 6 - An increasing inventory turnover ratio indicates...Ch. 6 - Ignoring taxes, if a company understates its...Ch. 6 - ( Appendix 6.4) Which of the following statements...Ch. 6 - ( Appendix 6B) Refer to the information for Morgan...Ch. 6 - ( Appendix 6B) Refer to the information for Morgan...Ch. 6 - ( Appendix 6B) Refer to the information for Morgan...Ch. 6 - Applying the Cost of Goods Sold Model Hempstead...Ch. 6 - Use the following information for Cornerstone...Ch. 6 - Use the following information for Cornerstone...Ch. 6 - Inventory Costing: FIFO Refer to the information...Ch. 6 - Inventory Costing: LIFO Refer to the information...Ch. 6 - Inventory Costing: Average Cost Refer to the...Ch. 6 - Effects of Inventory Costing Methods Refer to your...Ch. 6 - 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