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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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College Accounting, Chapters 1-27

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

An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1.

To determine

Identify whether the given statement is true or false.

Answer

An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1 is true.

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.Overstatement of beginning inventoryOverstatedUnderstatedUnderstated
8.Understatement of purchases plus understatement of ending inventory by the same amountNo effectNo effectNo effect

Table (1)

Thus, the above table indicates that if ending inventory is overstated in the same year (20-1) then it will cause the net income to be overstated in the same year (20-1).

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