Inventory ErrorsTyler Spraul, Erin Vallosio, Jia Yukun Echo, Jim Petersen

Goods In Transit•Sometimes purchased merchandise remains in transit at the end of a fiscal period.

•Ownership of the merchandise is determined by one of two methods:▫F.O.B. shipping point▫F.O.B. destination

F.O.B. Shipping Point•Ownership transfers to the purchaser

when the supplier delivers the goods to a common carrier, who acts as an agent to the company

•The merchandise is to be recorded as a purchase when the common carrier receives the items.

F.O.B. Destination•Ownership is transferred to the purchaser

when the common carrier delivers the merchandise to the company.

•The merchandise is to be recorded as a purchase when it is received from the common carrier.

Consigned Good•Under a consignment shipment, one

company (consignor) ships merchandise to another company (consignee). The consignee accepts the goods without any liability, except for due care and reasonable protection from damage or loss.

•When the consignee sells the goods, it returns the revenue to the consignor minus a selling commission and expenses incurred.

Consigned Goods (continued)•The consignee makes NO entry for the

consigned goods as they do not retain ownership

•The consignor continues to include the goods in their inventory account. They may show inventory out on consignment in a separate account if the amount is significant.

1. Callison uses the periodic method of recording inventory. A physical count reveals $234,890 of inventory on hand on December 31, 2004.

Inventory (ending) $234,890 Cost of Goods Sold $XXX

Purchases $XXX Inventory (beginning) $XXX

CLOSED

Callison Company -Adjusting entries for inventory

2. Not included in the physical count of inventory is $13,420 of merchandise purchased on December 15 from Browser. The merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.

Inventory $13,420 Cost of Goods Sold$13,420

Callison Company -Adjusting entries for inventory

3. Included in inventory is merchandise sold to Champion Company on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for $12,800 on December 31. The merchandise cost $7,350 and Champion received it on January 3.

Sales 12,800 A/R 12,800

Callison Company -Adjusting entries for inventory

4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of $15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

Cost of Goods Sold 15,630

A/P 15,630

Callison Company -Adjusting entries for inventory

Callison Company -Adjusting entries for inventory5. Not included in inventory is 48,540 of

merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.

Inventory $48,540 Cost of goods sold

$48,540 (To adjust ending inventory)

Callison Company -Adjusting entries for inventory6. Included in inventory was $10,438 of

inventory held by Callison on consignment from Jackel Industries.

Cost of goods sold $10,438 Inventory

$10,438 (To adjust mistaken recorded

inventory)

Callison Company -Adjusting entries for inventory7. Included in inventory is merchandise shipped

to Kemp f.o.b. shipping point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for $18,900 on December 31. The cost of this merchandise was $10,520, and Kemp received the merchandise on January 5.

Cost of goods sold $10,520 Inventory

$10,520 (To adjust ending inventory)

Callison Company -Adjusting entries for inventory8. Excluded from inventory was a carton labeled

“Please accept for credit.” This carton contains merchandise costing $1,500 which had been sold to a customer for $2,600. No entry had been made to reflect the return, but none of the returned merchandise seemed damaged.

Sales $2600 Account receivable $2600 Inventory $1500 Cost of goods sold $1500 (To adjust sales return)

Callison Company -Proper inventory balancePhysical count $234,890.00 Adjustment $13,420.00 $48,540.00 ($10,438.00) ($10,520.00) $1,500.00 Ending inventory $277,392.00

Impact of inventory errors

Callison Company -Impact of inventory errorsSections

Sales COGS Gross profit

Assets

Liabilities

Owners’ Equity

Impact NONE Over Under Under NONE Under

Amount

NONE $42502 $42502 $42502

NONE $42502

Conclusion 

Questions