I need help with letter D. please.

2. Inventories A. This question is designed to help you reason through the transactions related to accounting for inventories. For each of the transactions described below (items a and b), enter the effects of the transaction on the appropriate side (debit or credit) of the T-accounts affected. Note that the Cash and Accounts Payable accounts are not included in the T-accounts shown below, but would be credited for the expenditures involved in transaction a. a. Cost of items purchased or made. b. Cost of items sold. Balance Sheet / Income Statement Cost of Goods Sold Beginning Balance Ending Balance Total for the Period B. Assume that the company does not keep track of the physical items sold and does not record the cost of an item sold at the same time that the sale is recorded. Assume also that the company does actually count (and determine the cost of) its inventory at the end of every accounting period. Construct a model (i.e., equation) that this company could use to calculate the cost of goods sold at the end of the period. d If the beginning balance of the inventory account and the cost of items purchased or made during the period were correct, but an error resulted in understating the firm’s ending inventory balance by $4,000, would the firm’s net income be affected? If your answer is “yes,” explairn the amount and direction (overstated-too high or understated-too low) of the effect on net ncome

## Expert Answer

Solution D.

Return on Investment is the return on the assets which is calculated by dividing Income from operations by the Invested assets.

Higher the return on investment, the better the division is using its assets to generate Income.

Return on investment is calculated by the DuPont formula as shown below:

**A) Profit Margin**

Profit Margin is the ratio of Income from operations to sales.

**B) Investment Turnover**

Investment turnover is the ratio of sales to invested assets.

**C) Return on Investment**

Return on Investment is the profit margin multiplied by Investment turnover.

When the FIFO method will be used in place of LIFO (as the purchasing or manufacturing cost is rising so if FIFO will be used then goods will lower price will be sold first so cost of goods sold will be less and profit will be more) then the Profit Margin will incraese.

There will be no chnage in investment turnover as the sale and assets are not chnaging.

So ROI will also increase.

Example:

LIFO | FIFO | |||

Particulars | Amount ($) | Particulars | Amount ($) | |

Income from operations (a) | 36,000 | Income from operations (a) | 50,000 | |

Sales (b) | 720,000 | Sales (b) | 720,000 | |

Profit Margin (a/b) | 5% | Profit Margin (a/b) | 7% | |

Particulars | Amount ($) | Particulars | Amount ($) | |

Sales (a) | 720,000 | Sales (a) | 720,000 | |

Invested Assets (b) | 180,000 | Invested Assets (b) | 180,000 | |

Investment Turnover (a/b) | 4 | Investment Turnover (a/b) | 4 | |

Particulars | Amount ($) | Particulars | Amount ($) | |

Profit Margin (a) | 5% | Profit Margin (a) | 7% | |

Investment Turnover (b) | 4 | Investment Turnover (b) | 4 | |

Return on Investment (a*b) | 20% | Return on Investment (a*b) | 28% |