Dennis Lee, an Auditor with Knapp CPAs, Is Performing a Review

question 117

Essay

Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount.
1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation.
2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse until January 3.
3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all."
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.

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Definitions:

Trust Funds

A financial arrangement where assets are held and managed by one party for the benefit of another.

Personal Assets

Assets owned by an individual, including but not limited to, real estate, bank accounts, investments, and personal property.

Capital Contributions

Investments or funding provided by owners or shareholders to a business, typically in the form of cash or assets, in exchange for an ownership stake.

Management

The process of directing and controlling resources and activities to achieve specific goals.