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14 HASKINS & SELLS February Inventories Inventories perhaps offer as much opportunity for the display of accounting sense on the part of the auditor as any other subject with which he has to deal. The mechanical verification of an inventory may prove that the extensions and footings are correct. This generally speaking is important. It should not constitute a hard and fast rule to be followed blindly regardless of the circumstances. To do so may lead to much time-consuming work which is relatively meaningless. Inventories frequently contain many pages of items wherein either the quantities or the prices, or both, are small and the results unimportant compared with the total value of the inventory. It behooves the auditor to think about the relative significance of such items and not devote to them more time than they deserve. The inventory of a manufacturing chemist, for example, usually contains a great many items which are large in quantity and low in price, while there are a few items which are extremely high in price and likely to make up the bulk of the inventory value. Obviously the few items should receive careful attention while the many should receive only the general attention which their relative value merits. In connection with a cost study some time ago one of our accountants discovered that the prices used in the weaving department, weaving being the last operation, were lower than some of the prices used in the preceding departments. Upon investigation he discovered that the prices used had been taken from the inventory figures for work in process. These prices were used with confidence because the inventory was supposed to have been verified by certain accountants. There was no reason to believe that the accountants in question had neglected the verification of the inventory. There was reason to think that they had checked the inventory mechanically, verifying the extensions and footings, without giving consideration to the significance of the items. Inventories today must be considered in the light of present day prices. An increase in inventory values does not necessarily mean an increase in inventory. Formerly an increase in value was a signal for thought or perhaps an investigation of the cause. It may have meant poor judgment on the part of the purchasing officer in buying or on the part of the manager as to his needs. Now mere increase in the amount of an inventory may mean nothing because of the constant upward trend of prices. Before attempting to criticize or pass judgment on an increased inventory one must compare the quantities. Contemplation of the whole problem attempting to get the proper perspective should be a step precedent to the active work. Inventories constitute a good subject on which to practice this precept. Depreciation Problem The Columbus Power Company completed, as of December 31, 1916, a power plant building which cost $100,000. The estimated life of the building was fixed at 20 years. In closing the books at December 31, 1917, 1918 and 1919, respectively, the company made the proper provision for depreciation, crediting the amounts to a reserve for depreciation. At December 31, 1919, the company, at the suggestion of an insurance broker, who pointed out that replacement values have increased 100%, wrote up the value of the building $85,000.00, crediting surplus. The company then increased the amount of insurance carried on the building sufficiently to comply with the provisions of the 80% clause. What should be the amount of the depreciation charge for the year ending December 31, 1920?
Foreign exchange problem
Inventories -- Accounting
Foreign exchange -- Accounting
Columbus Power Co.
Pan-American chemical Co.
Haskins & Sells Bulletin, Vol. 03, no. 02 (1920 February 15), p. 14-15
|Source||Originally published by: Haskins & Sells|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Libraries. Accounting Collection|
|Identifier||HS Bulletin 3-p14|