Intermediate 1 FSR Project Part #1: Inventory Basics Goal: To practice correcting the financial statements for an inventory calculation error. (See Topic Guides A 13, 14, 37, 38). Information: Dover's management is afraid that an error was made when calculating COGS. Most of the calculations have already been checked by the auditors, but management still thinks that one inventory item has not been correctly recorded. They would like you to go back through the inventory calculations for that item to correct any possible mistakes. Currently they show that 7,800 units of item TC178, purchased for $8 each, were on hand at the beginning of the year, that $665,000 worth of TC178 was purchased during the year, that discounts of $3,200 were earned by making early payments on these purchases, and that $5,100 worth of returns were made during the year. The records show that only 7,000 units of the beginning TC178 inventory remained at the end of the year. . Dover uses the perpetual LIFO system for calculating inventory. Their inventory transactions for item TC178 for the period are as follows: (NOTE that the vendor provides free shipping on all units of TC178) . At the beginning of the period, 7,800 units of TC178, purchased for $8.00 each, were on band On Jan 15, an additional 23,000 units were purchased for $9.00 each. On February 28, 21,000 units were sold. On March 14, an additional 12,000 units were purchased for $11.00 each. . On March 20, a 20% cash discount was earned by paying for the March 14 purchase early. On March 30, 13,600 units were sold. On July 30, 4.300 units were sold. On August 20, an additional 21,000 units were purchased for $14.00 each. On September 2, 9,000 units were sold. On December 1, 8.400 units were sold. Dover's management would like to know the effect of your adjustment on the following ratios; Inventory Turnover (COGS / average total inventory) Current Ratio ROA Assignment: Calculations 1. Calculate each of the three (3) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to correct the reported values of item TC178 (including any necessary changes to income tax expense). 3. Make any necessary changes to the financial statemente 4. Calculate the three (3) ratios after you make any adjustments ACCTG 330 - Page 7 Critical Thinking 5. What do you think the investors' reaction will be to the adjustment of inventory? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with the restatement? Why or why not? 6. Who might be affected if the management team decided not to correct this error? Dover's 000 has repeatedly argued that no adjustment should be made to the current numbers. After all, she suggested, everything would be sold in the next period anyway. Why worry investors over something that is so unimportant? Defend your answer. Hints: 1. Start out by calculating Dover's COGS on TC178 given the original information. The best way to do this is to set up a formal COGS calculation like the one we did in our course videos. The formal calculation for one product would look just like the COGS section of the income statement, but it would only include the values for the one product. 2. Use the perpetual inventory method to find out what purchases, purchase discounts, and COGS should be for TC178 using a formal perpetual inventory table. Once you have those numbers, set up another formal COGS calculation like the one you made for the original information using the new information. 3. Compare the new COGS calculation to the old one. The differences between the two sets of calculations are the changes that you need to record in your journal entry. 4. When making your journal entry, keep in mind that Dover has a perpetual inventory system. This means the company doesn't have a purchase returns' or a 'purchase discount' account Instead, everything will be done using the inventory account. Your final entry, then, should change only three accounts: COGS, Inventory, and A/P. You can get the changes to COGS and Inventory from the differences in your COGS equations (old vs. new). You will use A/P as the plug figure. Why? Well, to explain that, we have to go back to what the original journal entries look like for a company that uses the perpetual inventory system. When we buy inventory in a perpetual system, we debit inventory and credit A/P. When we pay for inventory, we debit A/P and credit cash. If we get a discount or make a return, we debit A/P and credit Inventory. That means that any mistake in recording purchases, returns, or discounts would cause a mistake in both the Inventory account AND the A/P account. When we sell inventory, we would debit COGS and credit Inventory, so mistakes in recording sales would cause a mistake in both Inventory AND COGS. So, in order to correct for all of Dover's mistakes, we need to adjust all three of those accounts: Inventory, COGS and A/P ACCTG 330 - Page 8 D Dover Co. Multi-Step Income Statement For Year Ended December 31, 2020 Sales Revenue Sales Revenue Less: Sales Discounts Sales Retums Net Sales Revenue $29,100,000 $349,200 $1,382,250 $1,731,450 $27,368,550 Cost of Goods Sold Cost of Goods Sold Gross Profit $15,928,141 $11,440,409 $545,625 $37,830 $141,863 $400,125 $1,455,000 $238.256 Operating Activities Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Administrative Expenses Executive Salaries Expense Depreciation Expense 5 Insurance Expense 7 Miscellaneous Admin. Expenses 3 Office Supplies Expense 2 Consulting and Legal Fees Utilities Expense Total Administrative Expenses Income from Operations $2,818,699 $1,273,125 $1,746,000 $250,988 $14,368 $112.763 $18,188 $218.250 2 $3,633,682 $6,452,381 $4.988,028 Other Gains and Losses Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income $90,938 ($185,513) ($94.575) $4,893,453 (51 479 385) $3 414,068 EPS $1.03 S Dover Co. Balance Sheet As of 12/31/2020 2020 Assets 2019 Current Assets $1.256,000 $2,619,000 ($183,330) $3,492,000 $368 250 $363.750 $7,915,670 $1,455,000 $2,473,500 (S727,500) $4,074,000 $436,500 $291,000 $8,002,500 Cash A/R Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $1,164,000 $873,000 $2,037,000 $1,164,000 $873,000 $2,037,000 $3,201,000 $2,328,000 $8.148,000 (54,656.000) $9,021,000 $2,037,000 $2,328,000 $3,783,000 ($2.910.000) $5,238,000 $436 500 $19.410.170 $436,500 $15.714,000 $1,746,000 $291,000 $436,500 $363.750 $145,500 $2.982.750 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $422,902 Income Tax Payable $509,250 Uneamed Revenue $727,500 Wages Payablo $349,200 Current Portion of Loan Payable $145.500 Total Current Liabilities $2,154,352 Long-term Debt Loan Payable $727,500 Notes Payable $4.074.000 Total Long-term Debt $4,801,500 Total Liabilities $6,955,852 Stockholders' Equity Common Stock $3,300,000 (51 par 5,000,000 authorized, 3,300,000 outstanding) Additional Paid-In Capital $873,000 Retained Eamings $8.281,318 Total Stockholders' Equity $12454 318 Total Liabilities and Stockholder's E $19.410.170 5873,000 $2328.000 $3,201.000 $6.183,750 $3,300,000 $873,000 $5,357250 $9.530 250 $15.714,000 $3.414,068 Dover Co. Statement of Cash Flows For Year Ended December 31, 2020 Cash Flow from Operations Net Income Adjustments: Change in A/R ($689,670) Change in Inventory $582,000 Change in Prepaid Insurance $68,250 Change in Prepaid Rent ($72,750) Depreciation & Amortization $1,746,000 Change in A/P ($1,323,098) Change in Income Tax Payable $218,250 Change in Uneamed Revenue $291,000 Change in Wages Payable ($14,550) Net Cash Flow from Operations $805.432 $4,219,500 Cash Flow from Investments Purchase of Land Purchase of Equipment Net Cash Flow from Investments ($1,164,000) ($4 365,000) ($5,529,000) Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing ($145,500) $1,746,000 (S490,000) $1 110.500 Net Increase (Decrease) in Cash Cash January 1 Year 2 Cash, December 31, Year 2 ($ 199,000) $1,455,000 $1256,000 Final Journal Entries Financial Ratios Before After Critical Thinking #1 Critical Thinking 2 ) Calculations