Chapter 3, Problem 13E

Effect of shrinkage: Perpetual system

Ho Designs experienced the following events during 2018, its first year of operation:

1. Started the business when it acquired $70,000 cash from the issue of common stock.

2. Paid $41,000 cash to purchase inventory.

3. Sold inventory costing $37,500 for $56,200 cash.

4. Physically counted inventory showing $3,200 inventory was on hand at the end of the accounting period.

Required

a. Determine the amount of the difference between book balance and the actual amount of inventory as determined by the physical count.

b. Explain how differences between the book balance and the physical count of inventory could arise. Why is being able to determine whether differences exist useful to management?