Kubicki Company operates a chain of designer bags and shoes stores in the Housto
ID: 2503520 • Letter: K
Question
Kubicki Company operates a chain of designer bags and shoes stores in the Houston area. This year the company achieved annual sales of $75 million, on which it earned a net income of $3 million. At the beginning of the year, management implemented a new inventory system that enabled it to track all purchases and sales. At the end of the year, a physical inventory reveals that the actual inventory was $120,000 below what the new system indicated it should be. The inventory loss, which probably resulted from shoplifting, is reflected in a higher cost of goods sold. The probem concerns management but seems to be less important to the company's auditors.
what is materiality? Why might the inventory loss concern management more than it does the auditors? Do you think the amount of inventory loss is material?
Explanation / Answer
Materiality is the accounting concept relating to the importance or significance of a financial transaction, an amount or accounting misstatement. This concept is measured on an individual basis whenever a material transaction or misstatement occurs in the company's financial information. Generally Accepted Accounting Principles (GAAP) does not currently give hard rules or guidelines in its framework for accountants to follow when identifying material transaction or misstatements. It is hence a matter of professional judgment to assess what is material.
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