Reference no: EM131970513

Problem

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Errors in inventories if intentional or unintentional can have grave and sometimes detrimental effects on any company. The error in net income and gross profit is usually inversely proportional to the inventory or cost of goods sold. For example, if there is an understatement in the beginning inventory, your cost of goods sold will be understated. Then, since the cost of goods sold is understated, your net income and gross profit are overstated. An inventory error can permanently affect two or more accounting periods, the initial period the error accrued, and every accounting period after until the problem is resolved.

There are several types of inventory errors here are a few:

Incorrect unit count - Count of inventory is wrong this is the most common and noticeable error (Types of Inventory Errors).

Incorrect standard cost - Cost doesn't match the actual cost. This can cause a mismatch in inventory (Types of Inventory Errors).

Incorrect inventory layering - When using FIFO or LIFO method, the system has to assign a cost to an item based on the inventory layer in which it is located. If you are doing this manually, then you can assume a large proportion of operator errors (Types of Inventory Errors).

Growing up in New York I remember the insanely addictive commercials of Crazy Eddie. A chain of electronic stores which almost cornered the market in the late 70's. It was amazing to read how the effect of falsifying inventory records lead to the downfall of the company and the imprisonment of its founder.

References:

Harrison, W. T., Jr., Horngren, C. T., & Thomas, C. W. (2013). Financial Accounting. Pearson Types of Inventory Errors.