Sharon is the head cost accountant for Blindz, Inc., a factory that produces contemporary window blinds for personal residences. She is reviewing the work of Tara, a new accountant at the company. Tara has been finalizing the process costing numbers and has arrived at an ending inventory balance of $49,677. After closer review, Sharon realizes that this number included a sale in the amount of $2,400 with a cost of $989. The sale was Free on Board (FOB) shipping point and had been loaded onto the carrier by the close of the year but had not yet reached the buyer. If Sharon had not caught Tara's error, then how would this have impacted the income statement (ignoring income taxes)?

Question

Quizplus · Accepted Answer

The sale that was overlooked was FOB shipping point and had reached the carrier which meant that it should have been removed from the ending inventory balance and included in Cost of Goods Sold (COGS). This led to an overstatement of the inventory balance and an understatement of Cost of Goods Sold. The cost that should have been subtracted should be the $989 rather than the sale amount of $2,400. This error would have led to an understatement by $989 in Cost of Goods Sold and an overstatement of Net income by $989.

Sharon Is the Head Cost Accountant for Blindz, Inc