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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

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

An understatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-2, assuming no other errors.

To determine

Identify whether the given statement is true or false.

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)

Year 1Year 2
When ending inventory is overstatedSubsequent year  beginning inventory too will be overstated

Effect:

  • Cost of goods Sold is understated.
  • Income before tax is overstated...

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