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In 2018, Winslow International, Inc.’s controller discovered that ending inventories for 2016 and 2017 were overstated by $270,000 and $570,000, respectively.Determine the effect of the errors on retained earnings at January 1, 2018. (Ignore income taxes.)

Question

In 2018, Winslow International, Inc.’s controller discovered that ending inventories for 2016 and 2017 were overstated by $270,000 and $570,000, respectively.

Determine the effect of the errors on retained earnings at January 1, 2018. (Ignore income taxes.)

check_circleAnswer

Any company can prepare accurate income statements, statements of retained earnings, and balance sheets only if its inventory is correctly valued. If cost of ending inventory is wrongly valued than the impact of this incurred on cost of goods sold, net income and retained earnings for that period. If the ending inventory is overstated, cost of goods sold is understated for the period. This causes gross profit and net profit to be overstated in the income statement and current asset, fixed asset and retained earnings to be overstated in the balance sheet for the period. The overstated ending inventory for the current period shall be carried forward to the next period because ending inventory for the current period shall be beginning inventory for the next period. In the next period, cost of goods sold shall be overstated due to the beginning inventory is overstated. This causes gross profit and net profit to be understated in the income statement and current asset,...

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