Question: Halm Skidoos Limited, a private company that
Halm Skidoos Limited, a private company that began operations in 2014, always values its inventories at their current net realizable value. The company uses ASPE. Its annual inventory figure is arrived at by taking a physical count and then pricing each item in the physical inventory at current resale prices. The condensed income statements for the company’s past four years are as follows:
Instructions:
(a) Comment on the procedures that Halm uses for valuing inventories.
(b) Prepare corrected condensed income statements using an acceptable method of inventory valuation, assuming that the inventory at cost and as determined by the corporation (using net realizable value) at the end of each of the four years is as follows:
(c) Compare the trend in income for the four years using the corporation’s approach to valuing ending inventory and using a method that is acceptable under GAAP.
(d) Calculate the cumulative effect of the difference in the valuation of inventory on the ending balance of retained earnings from 2014 through 2017.
(e) Comment on the differences that you observe after making the corrections to the inventory valuation over the four years.
Transcribed Image Text:
2014 2015 2016 2017 $850,000 560,000 Sales $880,000 590,000 $950,000 630,000 $990,000 650,000 Cost of goods sold Gross profit Operating expenses 290,000 190,000 290,000 180,000 320,000 200,000 340,000 210,000 Income before taxes $100,000 $110,000 $120,000 $130,000 Year At Cost Net Realizable Value 2014 $150,000 147,000 178,000 175,000 $160,000 160,000 170,000 189,000 2015 2016 2017
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