College Accounting, Chapters 1-27
Solutions
College Accounting, Chapters 1-27
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.
Identify whether the given statement is true or false.
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 No | Details | Cost of goods sold | Net income | Retained earnings |
|
1. | Overstatement of ending inventory | Understated | Overstated | Overstated |
| 2. | Overstatement of purchases | Overstated | Understated | Understated |
| 3. | Understatement of beginning inventory | Understated | Overstated | Overstated |
| 4. | Freight-in charges are understated | Understated | Overstated | Overstated |
| 5. | Understatement of ending inventory | Overstated | Understated | Understated |
| 6. | Understatement of purchases | Understated | Overstated | Overstated |
| 7. | Overstatement of beginning inventory | Overstated | Understated | Understated |
| 8. | Understatement of purchases plus understatement of ending inventory by the same amount | No effect | No effect | No effect |
Table (1)
| Year 1 | Year 2 |
| When ending inventory is overstated | Subsequent year beginning inventory too will be overstated |
|
Effect:
|
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