Principles of Accounting
12th Edition
ISBN: 9781133626985
Author: Belverd E. Needles, Marian Powers, Susan V. Crosson
Publisher: Cengage Learning
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Chapter 7, Problem 1EA
To determine
Explain the way in which the conventions of consistency, full disclosure, and conservatism apply to this decision.
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The management of Sarasota Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Sarasota changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2020. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.
SARASOTA INSTRUMENT COMPANYSTATEMENT OF INCOME AND RETAINED EARNINGSFOR THE YEARS ENDED MAY 31
2016
2017
2018
2019
2020
Sales—net
$14,080
$15,420
$16,530
$18,390
$19,030
Cost of goods sold
Beginning inventory
990
1,100
990
1,120
1,230
Purchases
12,910
13,810
15,100
15,740
17,598
Ending inventory
(1,100)
(990)
(1,120)
(1,230)
(1,380)
Total
12,800
13,920
14,970
15,630
17,448
Gross…
During 2014, Vanguard, Ic., changed to the LIFO method of accounting for inventory. Suppose that during 2013, Vanguard changed back to the FIFO method and the following year Vanguard switches back to LIFO again. Requirements 1. What would you think of a company's ethics if it changed accounting methods every year? 2. What accounting principle would changing methods every year violate? 3. Who can be harmed when a company changes its accounting methods too often? How?
Honey Crunch Limited started business in 2018. It is now 2021 and the Board ofDirectors of Honey Crunch Limited hired Aegis Solutions to recommend howeach of the following types of accounting changes or errors should be dealt with.
The company changed its method of inventory pricing from FIFO toAverage Cost in 2020. The change was made from 2020 onwards. Just tosee the impact, the company also did an analysis of the change for theprevious years
As an audit assistant for Aegis, provide Honey Crunch with this information. Foreach issue write a note for the audit file (3-5 sentences) identify the type ofaccounting change or error, the appropriate accounting treatment, includeamounts where applicable and how net income would be impacted if the issueneeds correcting
Chapter 7 Solutions
Principles of Accounting
Ch. 7 - Prob. 1DQCh. 7 - Which of the following methods do not require a...Ch. 7 - Prob. 3DQCh. 7 - Prob. 4DQCh. 7 - Prob. 5DQCh. 7 - Prob. 6DQCh. 7 - Prob. 7DQCh. 7 - Prob. 1SECh. 7 - Assume the following data with regard to inventory...Ch. 7 - Prob. 3SE
Ch. 7 - Prob. 4SECh. 7 - Prob. 5SECh. 7 - Prob. 6SECh. 7 - Prob. 7SECh. 7 - Prob. 8SECh. 7 - Prob. 9SECh. 7 - Prob. 10SECh. 7 - Prob. 11SECh. 7 - Prob. 12SECh. 7 - Prob. 1EACh. 7 - Prob. 2EACh. 7 - Prob. 3EACh. 7 - Prob. 4EACh. 7 - Prob. 5EACh. 7 - Prob. 6EACh. 7 - During July 2014, Micanopy, Inc., sold 500 units...Ch. 7 - Prob. 8EACh. 7 - Prob. 9EACh. 7 - Prob. 10EACh. 7 - Prob. 11EACh. 7 - Prob. 12EACh. 7 - Midori Company merchandises a single product...Ch. 7 - The inventory of Wood4Fun and data on purchases...Ch. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6APCh. 7 - DiPaolos inventory, purchases, and sales for March...Ch. 7 - Prob. 8APCh. 7 - Prob. 9APCh. 7 - Zubac Company is a large retail furniture company...Ch. 7 - Prob. 1CCh. 7 - Prob. 2CCh. 7 - ExxonMobil Corporation had net income of 41.0...Ch. 7 - Prob. 4CCh. 7 - JCPenney, a large retail company with many stores,...
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- If Wakowski Companys ending inventory was actually $86,000 but was adjusted at year end to a balance of $68,000 in error, what would be the impact on the presentation of the balance sheet and income statement for the year that the error occurred, if any?arrow_forwardHoney Crunch Limited started business in 2018. It is now 2021 and the Board ofDirectors of Honey Crunch Limited hired Aegis Solutions to recommend howeach of the following types of accounting changes or errors should be dealt with.As an audit assistant for Aegis, provide Honey Crunch with this information. The company changed its method of inventory pricing from FIFO toAverage Cost in 2020. The change was made from 2020 onwards. Just tosee the impact, the company also did an analysis of the change for theprevious years For each issue write a note for the audit file (3-5 sentences) identify the type ofaccounting change or error, the appropriate accounting treatment, includeamounts where applicable and how net income would be impacted if the issueneeds correcting.arrow_forwardFarley Bains, an auditor with Nolls CPAs, is performing a review of Ryder Company’s Inventory account. Ryder Company did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $740,000. However, the following information was not considered when determining that amount. Included in the company’s count were goods with a cost of $228,000 that the company is holding on consignment. The goods belong to Nader Corporation. The physical count did not include goods purchased by Ryder Company with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Ryder Company’s warehouse until January 3. Included in the Inventory account was $17,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year. The company received an order on December 29 that was boxed and was sitting on the…arrow_forward
- In fiscal year 2020, the company had accumulated inventory impairment of 2000. In fiscal year 2021, the company considered that the required amount of accumulated impairment amounted to 1300 and thus reversed the difference in results. However, according to the Auditor, the required amount of accumulated impairment in the year 2021 amounted to 2500. If the amount of net profit of the income statement in 2021 is 20000, how much is the actual profit of the business?arrow_forwardCandle Co. performs an inventory court at year - end. The company records a ending balance of $56,000 for inventory on its balance sheet. During the following year, the accountant discovers that the ending inventory was miscounted, causing ending inventory to be overstated by $2, 500. a. What is the effect of the misstatement on the income statement? b. Besides ending inventory, what was the effect of the error on the balance sheet?arrow_forwardDierdorf Inc., a closely held corporation, has decided to go public. The controller, Ed Floyd, is concerned with presenting interim data when a LIFO inventory valuation is used. What problems are encountered with LIFO inventories when quarterly data are presented?arrow_forward
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- Following are independent cases. Please check the accounting treatments and given calculations wherever provided. Specifically, you are expected to COMMENT on whether the accounting treatment is correct or not. If you agree or disagree, Explain your answer and provide Calculations if needed. A. During 2020, CEPS Company produced oil and recorded the production costs as inventory. At the end of the year, the accountant decided to report these inventories using the net realizable value approach. He reported an inventory of $1,050,000 which is higher than the cost. B. In November 2020, North Oil Company sold 250 Mcf of gas with heat content of 1.040 MMBtu/Mcf and selling price of $4.20 per MMBtu. The company’s accountant reported total sales revenue of $1,050. C. During 2020, National Company decided to shut-in a producing well and paid $2,000 per month during the months of March through May. These shut-in payments are not recoverable from future production. In March, National’s…arrow_forwardDwight’s Trophy Shop is considering the following accounting changes:a. Increase the allowance for uncollectible accounts.b. When costs are going up, change from LIFO to FIFO.c. Change from the straight-line method of depreciation to declining-balance in the second year of equipment with a 10-year life.d. Record a smaller expense for warranties.Required:Classify each accounting change as either conservative or aggressive.arrow_forwardPenn Company is in the process of adjusting and correcting its books at the end of 2020. In reviewing its records, the following information is compiled. 1. Penn has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2019 $3,500 December 31, 2020 $2,500 2. In reviewing the December 31, 2020, inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. December 31, 2018 Understated $16,000 December 31, 2019 Understated $19,000 December 31, 2020 Overstated $ 6,700 Penn has already made an entry that established the incorrect December 31, 2020, inventory amount. 3. At December 31, 2020, Penn decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2018. It has a 10-year…arrow_forward
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