Inventory Errors
Response to the following problem:
You are the controller of a rapidly growing mass merchandiser. The company uses a periodic inventory system. As the company has grown and accounting systems have developed, errors have occurred in both the physical count of inventory and the valuation of inventory on the balance sheet.
You have been able to identify the following errors as of December 2008:
• In 2006, one section of the warehouse was counted twice. The error resulted in inventory overstated on December 31, 2006, by approximately $45,600.
• In 2007, the replacement cost of some inventory was less than the FIFO value used on the balance sheet. The inventory would have been $6,000 less on the balance sheet dated December 31, 2007.
• In 2008, the company used the gross profit method to estimate inventory for its quarterly financial statements. At the end of the second quarter, the controller made a math error and understated the inventory by $20,000 on the quarterly report. The error was not discovered until the end of the year.
Required:
What, if anything, should you do to correct each of these errors? Explain your answers.