Question
ABC Company recently hired an internee in its accounts section, Mr. Rashed. Rashed has found out the following information with respect to cost and market
ABC Company recently hired an internee in its accounts section, Mr. Rashed. Rashed has found out the following information with respect to cost and market value of ending inventory:
Inventory items | Cost (Tk.) | Market value (Tk.) |
A | 40,000 | 42,000 |
B | 33,100 | 31,000 |
C | 38,000 | 40,000 |
D | 28,900 | 31,000 |
He determined the value of inventory as Tk. 1,40,000 (At cost price). He has least accounting knowledge in the manufacturing sector. He has also set out the following impacts of ending inventory errors on income statement and balance sheet items:
Ending Inventory errors | COGS | Net income | Assets | Owners equity | Liability |
Overstated | Overstated | Understated | Overstated | Understated | None |
Understated | Understated | Overstated | Understated | Overstated | None |
He also thinks that any error in ending inventory in the current period will have the same effect on net income in the next period. He applied LIFO method of allocating the cost of ending inventory.
a) Redo the inventory valuation following LCM principle.
b) Identify the misconceptions and errors made by Rashed.
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