An Independent Accounting Firm Has Been Engaged to Audit the 2014

question 124

Essay

An independent accounting firm has been engaged to audit the 2014 financial statements of a corporation which has never undergone an audit. During the audit, it is concluded that the 2014 ending inventory presented by management is in error. The inventory cannot be counted because much of it has been sold as of the time of the audit. Therefore, a "test of reasonableness" of the inventory is performed by using the following data from the 2014 income statement prepared by the client.
(a) Sales revenue, $182,000; return sales, $2,000
(b) Purchases, $100,000, purchase returns, $1,000
(c) Freight-in, $2,000
(d) Beginning inventory, $26,000; ending inventory, $60,000
Estimated gross margin rate, 45 percent on sales.
Required:
The approximate 2014 ending inventory is, $_______________ Computations:

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Definitions:

Fair Value

An estimate of the price at which an asset or liability could be traded in a fair transaction between willing parties, other than in a forced or liquidation sale.

Cost Method

An accounting method used to record investments, where the investment is recorded at its acquisition cost without recognizing periodic gains or losses.

Outstanding Stock

The total shares of a company's stock that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Net Income

The remaining earnings of a company after deducting all expenditures and taxes from the revenues.