Essay Question

Marsha Thomason, an auditor with Dorrit CPAs, is performing a review of Mikhail Company’s inventory account. Mikhail did not have a good year and top management is under pressure to boost reported income. According to its records, the inventory balance at year end was $740,000. However, the following information was not considered when determining that amount.

1. Included in the company’s count were goods with a cost of $250,000 that the company is holding on consignment. The goods belong to Bakunin Corporation.
2. The physical count did not include goods purchased by Mikhail with a cost of $40,000 that were shipped FOB destination on December 28 and did not arrive at Mikhail’s warehouse until January 3.
3. Included in the inventory account was $17,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.
4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29, Mikhail shipped goods with a selling price of $80,000 and a cost of $60,000 to Omar Sales Corporation FOB shipping point. The goods arrived on January 3. Omar Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Mikhail had authorized the shipment and said that if Omar wanted to ship the goods back next week, it could.
6. Included in the count was $40,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Mikhail’s products, it