1. Question 1: Competent: Explain why proper inventory valuation is so important in calculating a company's "bottom line" profit. A merchandise business needs to make sure it has properly valued its inventory for three reasons. If ending inventory is overstated, the cost of goods is not reported, resulting in an overstatement of gross margin and net income. Overstating ending inventory also affects current assets, total assets, and retained earnings, because any changes to ending inventory are calculated dollar for dollar (ignoring the effects of income tax), in net income, current assets and retained earnings. the company incorrectly declares its ending inventory during the current year, the company carries over the inaccuracy to the following year; the reason is that the ending inventory of the current year is the beginning inventory of the following year. Finally, an error in one accounting period in ending inventory automatically causes an error in net income in the opposite direction in the next period. However, after 2 years the error disappears and the assets and retained earnings are correctly reported. What is the meaning of taking a physical inventory and why is it important to take a physical inventory when using a perpetual inventory system. A physical inventory means a business must count, weigh, measure or estimate the physical quantities of goods on hand. Using this ensures that businesses accurately report the quantity of their inventory on hand. When businesses use a perpetual inventory system, they can get real-time data on cost of goods sold and ending inventory, making it easier to calculate net income. Events may cause the inventory account balance to differ from mid-year. paper......Chicago, Las Vegas. Retrieved May 8, 2014, from http://www.mcgoverngreene.com/archives/archive_articles/Craig_Greene_Archives/inventory_accounting.htmlInventories: Measurement. (January 1, 2014). What is included in the inventory?. Retrieved May 8, 2014, from http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter8/chbody1/what_is_inclus_in_inventory_.htmHermanson, R., Edwards, J., & Maher, M. (2010). ).Accounting principles: a business perspective. (Vol.2). Manuel Équité inc. DOI: www.textbookequity.comPrinciples of Accounting. (January 1, 2013). Principles of accounting. Accessed May 8, 2014 at http://www.principlesofaccounting.com/chapter8/chapter8.htmlSiegel Ph.D. CPA, Joël G.; Cale Ph.D., Jae K. (02/01/2010). Dictionary of Accounting Terms (Barron's Dictionary of Accounting Terms) (p. 129). Barron's Educational Series. Kindle Edition.