# CMA Study Group

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• #### 1.  inventory

Posted 25 days ago
Merchandise that was purchased on account was accepted by the Orion Company. As of December 31, Orion had recorded the transaction using the periodic method, but did not include the merchandise in its inventory. What would be the effect of this on the financial statements for December 31?

could someone please explain how cogs are over stated.

A: current asset, retained earning, NI understated.
as per my understanding since inventory is understated cogs will be understated and NI  overstated.

• #### 2.  RE: inventory

Posted 25 days ago
Hi Kirti,

To calculate COGS under the periodic method, the following formula is use:

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold

Let me give you an example below:

Scenario-01 (if merchandise of \$10,000 is included in the inventory )
 Cost of Goods Sold Inventory-beg. 100,000.00 Add: Purchases 50,000.00 Goods available for sale 150,000.00 Less: Inventory-end 90,000.00 60,000.00

Scenario-02 (if merchandise of \$10,000 is omitted in the inventory )
 Cost of  Goods Sold Inventory-beg. 100,000.00 Add: Purchases 50,000.00 Goods available for sale 150,000.00 Less: Inventory-end 80,000.00 70,000.00

As you can see, in Scenario-2, where the goods are omitted resulted in an overstated COGS amounting to \$10,000. Under the periodic method, the inventory balance is not updated on a continuous basis, but the COGS and the value of ending inventory is determined by conducting a physical count of the inventory on hand at the end of the period.

Remember COGS and ending inventory have an inverse relationship, meaning if the latter is understated, the former will be overstated.

• #### 3.  RE: inventory

Posted 25 days ago

Hi,
Since given  that the merchandise is not included in inventory.
Thus, Ending inventory is understated and therefore the  corresponding  COGS will be overstated. See the below example for more clarity with note no.1

 Particulars: Case-I if included in inventory Case-II  Did not included in inventory in \$ in \$ Beginning Inventory 10,000.00 10,000.00 Plus :Purchases 14,000.00 14,000.00 Less: Ending Inventory( as per Periodic Inventory system) -6,000.00 -4,000.00 Cost of Good Sold 18,000.00 20,000.00 In this example Case-II,  the amount of \$2,000 inventory has not been considered in ending inventory. Note for Case-II 1. If Beginning inventory and Purchases are recorded  correctly,however, inventory items are excluded from ending inventory: Then COGS will be overstated and Net incomeretained earnings, working capital will be understated 2. If purchase on account is not recorded  and also not included in the  endinginventory  then  no impact or effect on COGS and NI. However, CA & CL is understated

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Kishore Kumar N
Bengaluru
Karnataka
India
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