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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

INVENTORY ERRORS Assume that in year 1, the ending merchandise inventory is understated by $40,000. If this is the only error in years 1 and 2, indicate which items will be understated, overstated, or correctly stated for years 1 and 2.

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To determine

Indicate which items will be understated, overstated, or correctly stated for years 1 and 2.

Explanation

Inventory error: It is the error to identify a mistake in physical count or in pricing qualities. It is also discovered in same accounting period.

The following table shows the effect of inventory errors:

Serial NoDetailsCost of goods soldNet incomeRetained earnings

1.

Overstatement of ending inventoryUnderstatedOverstatedOverstated
2.Overstatement of purchasesOverstatedUnderstatedUnderstated
3.Understatement of beginning inventoryUnderstatedOverstatedOverstated
4.Freight-in charges are understatedUnderstatedOverstatedOverstated
5.Understatement of ending inventoryOverstatedUnderstatedUnderstated
6.Understatement of purchasesUnderstatedOverstatedOverstated
7...

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