Chapter 6, Problem 6.10BP

Determine the effects of inventory errors using FIFO (LO6–3,6–9)

Sylvester has a bird shop that sells canaries. Sylvester maintains accurate records on the number of birds purchased from its suppliers and the number sold to customers. The records show the following purchases and sales during 2018.

Sylvester uses a periodic inventory system and believes there are 60 birds remaining in ending inventory. However, Sylvester neglects to make a final inventory count at the end of the year. An employee accidentally left one of the cages open one night and 10 birds flew away, leaving only 50 birds in ending inventory. Sylvester is not aware of the lost canaries.

Required:

  1.    What amount will Sylvester calculate for ending inventory and cost of goods sold using FIFO, assuming he erroneously believes 60 canaries remain in ending inventory?

  2.    What amount would Sylvester calculate for ending inventory and cost of goods sold using FIFO if he knew that only 50 canaries remain in ending inventory?

  3.    What effect will the inventory error have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2018?

  4.    Assuming that ending inventory is correctly counted at the end of 2019, what effect will the inventory error in 2018 have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2019?