PPI's management is afraid that an error was made when calculating ending inventory and COGS for the year. They would like you to go back through the inventory calculations to correct any possible mistakes.

PPI uses the Dollar Value LIFO system for calculating inventory. The price index for $2022$ is $108,$ and the price indices for $2021$ and $2020$ were $105$ and $100,$ respectively.

If PPI had purchased its $2020$ inventory at the end of $2020,$ it would have cost the company $$2,942,940.$ If the company had purchased its $2021$ on December $31,2021,$ it would have cost the company $$3,969,147.$ If the company had purchased all of the items still inventory on December $31,2022$ on December $31,2022,$ it would have cost the company $$3,885,991.$

PPI$$s management would like to know the effect of your adjustment, if any, on the following ratios:

$$ Inventory Turnover $($COGS $/$ average total inventory$)$

$$ Current Ratio

$$ ROA $($Net Income $/$ Average Total Assets$)$

$1.$ Make the appropriate journal entries, if any, to correct the reported values of inventory and COGS $($including any necessary changes to income tax expense$).$

$2.$ Make any necessary changes to the financial statements.

$3.$ Calculate each of the required ratios using the original values $($before any changes$)$ and the updated values $($after your changes$).$

$4.$ How do you think market analysts will react to the corection to inventory? Do you think they will downgrade their recommendation from buy to hold or sell? Why or why not?

$5.$ his adjustment is relatively large. Making a change of this magnitude at this point in the fiscal year could be concerning to the company's stakeholders. In fact, PPI$$s CEO is very worried about the impact this correction will have on the auditor's report. She has proposed that rather than make the current change, the company should switch from Dollar Value LIFO to a perpetual weighted average inventory system. After all, a weighted average is much closer to the way inventory actually flows through PPI$$s system. Since it is more accurate, why not make the change now? Do you agree with the CEO's recommendation?

Why or why not?

Hints:

$1.$Remember that the Dollar Value LIFO calculation requires calculations based on previous years layers, all the way back to the base year. You will need to calculate the layers from those earlier years in order to determine this year's ending value.

$2.$ Once you have the correct ending inventory number, set up a t$-$account for Inventory. In your account, use the current inventory values from the balance sheet as the beginning account balance. Now set the correct balance from your Dollar Value LIFO calculation as the desired ending balance in the account. What would you need do to change the current, incorrect balance into the desired, correct balances?

$3.$ Keep in mind that when using the Dollar Value LIFO method, COGS is calculated using the equation: COGAS $-$ Ending Inventory $=$ COGS. With that in mind, what other account will you use for your correcting entry?