Gatineau Bank is considering giving Novotna Corporation a short-term bank loan. Before doing so, it decides that further discussions with Novotna's accountant may be desirable. One area of particular concern is the inventory account, which according to a recent physical inventory count has a balance of $285,000 at December 31. This count agreed with the accounting records. Discussions with the accountant reveal the following:

1. Novotna sold goods costing $35,000 to India-based Moghul Company, FOB destination, on December 28. The goods are not expected to arrive in India until January 12. The goods were not included in the physical inventory count, because they were not in the warehouse.

2. The physical inventory count did not include goods costing $95,000 that were shipped to Novotna, FOB shipping point, on December 27 and were still in transit at year end.

3. Novotna received goods costing $28,000 on January 2. The goods were shipped FOB shipping point on December 26 by Cellar Corp. The goods were not included in the physical inventory count.

4. Novotna sold goods costing $49,000 to United Kingdom-based Sterling of Britain Ltd., FOB shipping point, on December 30. The goods were received by Sterling on January 8. They were not included in Novotna's physical inventory count.

5. On December 31, Schiller Corporation had $30,500 of goods held on consignment for Novotna. The goods were not included in the physical inventory count.

6. Included in the physical inventory count were $15,000 of parts for outdated products that the company had not been able to sell. It is unlikely that these obsolete parts will have any other use.

Instructions

(a) Determine the correct inventory amount on December 31.

(b) Explain why having an accurate inventory count is important to the bank in assessing whether to give Novotna a shortterm bank loan or not.