Concept explainers
Inventory errors
• LO20–6
You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2018, you discover the following errors related to the 2016 and 2017 financial statements:
a. Inventory at 12/31/2016 was understated by $6,000.
b. Inventory at 12/31/2017 was overstated by $9,000.
c. On 12/31/2017, inventory was purchased for $3,000. The company did not record the purchase until the inventory was paid for early in 2018. At that time, the purchase was recorded by a debit to purchases and a credit to cash.
The company uses a periodic inventory system.
Required:
1. Assuming that the errors were discovered after the 2017 financial statements were issued, analyze the effect of the errors on 2017 and 2016 cost of goods sold, net income, and
2. Prepare a
3. What other step(s) would be taken in connection with the error?
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INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- Error in inventory During 2016, the accountant discovered that the physical inventory at the end of 2015 had been understated by 42,750. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 2016. Are there any flaws in the accountants assumption? Explain.arrow_forwardProblem 9-15 (Algo) Inventory errors [LO9-7] You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2021, you discover the following errors related to the 2019 and 2020 financial statements a. Inventory at December 31, 2019, was understated by $6,500. b. Inventory at December 31, 2020, was overstated by $9,500 c. On December 31, 2020, inventory was purchased for $3,500. The company did not record the purchase until the inventory was paid for early in 2021. At that time, the purchase was recorded by a debit to purchases and a credit to cash. The company uses a periodic inventory system. Required: 1. Assuming that the errors were discovered after the 2020 financial statements were issued, analyze the effect of the errors on 2020 and 2019 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) 2. Prepare a journal entry to correct the errors. Complete this question by entering your answers in the tabs below.arrow_forwardEffects of an Inventory Error The income statements for Graul Corporation for the 3 years ending in 2019 appear below. During 2019, Graul discovered that the 2017 ending inventory had been misstated due to the following two transactions being recorded incorrectly. a. A purchase return of inventory costing $42,000 was recorded twice. b. A credit purchase of inventory' made on December 20 for $28,500 was not recorded. The goods were shipped F.O.B. shipping point and were shipped on December 22, 2017. Required: 1. Was ending inventory for 2017 overstated or understated? By how much? 2. Prepare correct income statements for all 3 years. 3. CONCEPTUAL CONNECTION Did the error in 2017 affect cumulative net income for the 3-year period? Explain your response. 4. CONCEPTUAL CONNECTION Why was the 2019 net income unaffected?arrow_forward
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