For all exercises, assume the perpetual inventory system is used unless stated otherwise. Measuring the effect of an inventory error Hot Bread Bakery reported Net sales revenue of $44,000 and cost of goods sold of $33,000. Compute Hot Bread’s correct gross profit if the company made cither of the following independent accounting errors. Show your work. a. Ending merchandise inventory is overstated by $8,000. b. Ending merchandise inventory is understated by $8,000.

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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.