A department store had items in its inventory at the end of the year that had a recorded book value of $10,000 and, because of fashion changes, a market value of only $7,000.The department store failed to write down these inventory items to market value.To keep the obsolete condition of the inventory items away from its auditors, the firm shipped the goods to a remote warehouse.The effect of this error was to
A)understate the inventory turnover ratio.
B)overstate the cost of goods sold to sales percentage.
C)overstate the total assets turnover ratio.
D)understate net income.
E)none of the above

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated as the cost of goods sold divided by average inventory. By not writing down the inventory to its market value, the average inventory is overstated, leading to an understatement of the inventory turnover ratio.

A Department Store Had Items in Its Inventory at the End