Intermediate Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText -- Access Card Package (2nd Edition)
2nd Edition
ISBN: 9780134833118
Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
Publisher: PEARSON
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Textbook Question
Chapter 21, Problem 1JC
Cases Judgment Case
Judgment Case: Materiality and Error Corrections
SAB Topic 1 M., Assessing Materiality, found in FASB ASC 250-10-S99-1, presents the SEC’s views on the issue of materiality in the financial statements. Based on this document, indicate whether each of the following errors is material and thus should be corrected.
- 1. Talky Solutions discovered several large errors. One error overstates inventory and understates cost of goods sold by 8% of uncorrected net income. The other error understates sales revenue and understates accounts receivable by 8.5% of uncorrected net income. Consequently, the two errors combined result in a slight understatement of net income.
- 2. Net income for the current year for Walker Electric is $1,500,000. It has discovered an error that affects its
contingent liability account in the amount of $35,000. The error understates the liability account and overstates net income. Walker has also discovered an error that affects its accounts payable account in the amount of $35,000. The error understates the liability account and overstates net income. - 3. Net income for CoCo Corporation is $7,000,000 in the current year. CoCo has a simple capital structure with 1,000.000 shares outstanding, so earnings per share is $7.00 per share. Earnings per share was $6.94 last year and $6.90 the year before that. Analyst
forecasts for CoCo’s earnings per share this year will be $6 98 CoCo discovered an error of $40,000 that affects its inventory accounts and overstates net income. - 4. Net income for Soda, Inc is $5,000,000 in the current year. Soda has a simple capital structure with 1,000,000 shares outstanding, so earnings per share is $5 per share. Earnings per share was $4 95 last year and $4 93 the year before that Soda discovered an error of $20 000 in its estimate of
bad debts that overstates income.
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PROBLEM 1: Identifying effects of common errors
Requirement: Complete the schedule below by entering an Q to indicate overstatement, a I to
indicate understatement, and NE if no effect.
Effect of Error On:
Net income Assets Liabilities Capital
a. Ending inventory for 2020 understated:
2020 financial statements
2021 financial statements
b. Ending inventory for 2021 overstated:
2020 financial statements
2021 financial statements
c. Failed to record depreciation in 2020:
2020 financial statements
2021 financial statements
d. Failed to record accrued salaries payable in
2020:
2020 financial statements
2021 financial statements
e. Overstatement of accrued rent revenue in 2020:
2020 financial statements
2021 financial statements
f. Failed to record a liability resulting from
revenue collected in advance at end of 2020;
instead, credited revenue in full erroneously:
2020 financial statements
2021 financial statements
g. Failed to record an asset resulting from
expenses paid in advance at end…
Some inventory errors are said to be “self-correcting,” in that the error has the opposite financial statement effectin the period following the error, thereby “correcting,” the original account balance errors.Required:Despite this self-correcting feature, discuss why these errors should not be ignored and describe the steps requiredto account for the error correction.
H6.
Lower of cost or market is an attribute used for the:
a. initial measurement of accounts receivable
b. subsequent measurement of inventory
c. subsequent measurement of accounts receivable
d. initial measurement of inventory
Explain All wrong options and explain with full details
Chapter 21 Solutions
Intermediate Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText -- Access Card Package (2nd Edition)
Ch. 21 - Are accounting changes permitted in financial...Ch. 21 - How do firms report accounting changes under the...Ch. 21 - Prob. 21.3QCh. 21 - How do firms account for changes in accounting...Ch. 21 - Prob. 21.5QCh. 21 - Prob. 21.6QCh. 21 - Prob. 21.7QCh. 21 - Prob. 21.8QCh. 21 - Do accounting errors that self-correct within two...Ch. 21 - Does a firm need to correct an error that...
Ch. 21 - Prob. 21.1MCCh. 21 - Prob. 21.2MCCh. 21 - Prob. 21.3MCCh. 21 - Prob. 21.4MCCh. 21 - Prob. 21.5MCCh. 21 - Prob. 21.1BECh. 21 - Prob. 21.2BECh. 21 - Prob. 21.3BECh. 21 - Prob. 21.4BECh. 21 - Change in Accounting Principle, Long-Term...Ch. 21 - Prob. 21.6BECh. 21 - Prob. 21.7BECh. 21 - Prob. 21.8BECh. 21 - Prob. 21.9BECh. 21 - Prob. 21.10BECh. 21 - Prob. 21.11BECh. 21 - Prob. 21.12BECh. 21 - Prob. 21.13BECh. 21 - Prob. 21.14BECh. 21 - Change in Accounting Principle, Inventory. Massi...Ch. 21 - Change in Accounting Principle, Long-Term...Ch. 21 - Prob. 21.3ECh. 21 - Change in Accounting Principle, Inventory. Winthur...Ch. 21 - Prob. 21.5ECh. 21 - Prob. 21.6ECh. 21 - Error Analysis and Correction. Feinstein and...Ch. 21 - Prob. 21.8ECh. 21 - Prob. 21.9ECh. 21 - Prob. 21.10ECh. 21 - Change in Accounting Principle, Inventory. Second...Ch. 21 - Prob. 21.2PCh. 21 - Prob. 21.3PCh. 21 - Prob. 21.4PCh. 21 - Prob. 21.5PCh. 21 - Change in Estimate, Inventory, Bad Debt Expense....Ch. 21 - Prob. 21.7PCh. 21 - Cases Judgment Case Judgment Case: Materiality and...Ch. 21 - Prob. 1FSCCh. 21 - Surfing the Standards: Change in Accounting...Ch. 21 - Prob. 1BCC
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- Errors in Ending Inventory From time to time, business news will report that the management of a company has misstated its profits by knowingly establishing an incorrect amount for its ending inventory. Required: Explain how a misstatement of ending inventory can affect profit.arrow_forwardWhich accounting rule serves as the primary basis for the lower-of-cost-or-market methodology for inventory valuation? A. conservatism B. consistency C. optimism D. pessimismarrow_forwardUse the following to answer questions 39 –40 MATCH... For each of the following independent situations, fill in the blanks to indicate the effect of the error on each of the various financial statement items. Assume that each of the companies uses a periodic inventory system. Indicate: (A) an understatement (B) an overstatement or (C) no effect, correct Balance Sheet Income Statement Net Income Ending Inventory Earnings Retained Cost of Error Goods Sold 39. Understated EI in year 1, affect on items in year 1.Ja. b. с. d. 40. JUnderstated EI in year 1, affect on items in year 2.Ja. b. d. с.arrow_forward
- Do you agree with the following statements? Express your opinion on each statement. An inventory error that causes an understatement (or overstatement) for net income in one accounting period, if not corrected, will cause an overstatement (or understatement) in the next. Since an understatement (overstatement) of one period offsets the overstatement (understatement) in the next, such errors are said to correct themselves. Market usually means replacement cost of inventory when applied in the LCM. Cost of goods available for sale equals ending inventory plus cost of sales.arrow_forwardT, F. Under the GAAP rule, inventories can be reported at above cost in the balance sheet. T, F. If ending inventory is overstated due to quantity or cost errors, but purchases are corrected, the effect in income statement is overstatement because of the cost of goods sold that is understated.arrow_forward3. Indicate the effect of the following errors on gross profit and cost of goods sold (COGS), i.e., whether 'understatement or overstatement'. Treat each item independently of the other items and assume a periodic inventory system. Nature of error Effect of error on: Gross profit COGS a. Overstatement of beginning inventory b. Understatement of purchases c. Overstatement of purchase returns d. Understatement of purchase returns e. Overstatement of ending inventory f. Understatement of ending inventoryarrow_forward
- 1. On which of the following instances is cost estimation not permitted? A. Estimating the cost of inventory destroyed by fire or other natural calamities. B. Presenting the value of inventory in an interim financial statement. C. Reporting of inventory at the Statement of Financial Position at year-end. D. Estimating the value of inventory missing because of theft. 2. Under the gross profit method, if the gross profit rate is based on cost, the cost of sales is computed as A. Gross sales times cost ratio B. Net sales divided by sales ratio C. Net sales times cost ratio D. Gross sales divided by sales ratio 3. In computing cost ratio, the conservative/conventional retail method should A. Exclude mark-up but not markdown B. Include mark-up and markdown C. Exclude mark-up and markdown D. Include mark-up but not markdownarrow_forwardWhich of the following statements is not incorrect? I. PAS 2 requires the use of the Allowance Method in accounting for inventory write-down. II. There shall always be an allowance for inventory write-down if the net realizable value of inventories is lower than its cost. III. Regardless of what method the company uses in accounting for inventory write-down, the cost of goods sold must always be the same IV. A company may recognize a gain on reversal of inventory write-down even if the cost of inventory exceeds its net realizable value. a. I and II b. None of these c. II and III d. III and IV e. I and IVarrow_forwardah - ELearning Which method tracks the actual physical flow of goods and each item of inventory is marked, tagged, or coded with unit cost. O a. First in, first out O b. Last in, last out O c. Weighted average method O d. Specific identification method 20 A contingent liability should be recorded in the accounts when: O a. it is reasonably possible the contingency will happen, but the amount cannot be reasonably estimated O b. it is probable the contingency will happen, and the amount owed can be reasonably estimated O citis reasonably possible the contingency will happen, and the amount can be reasonably estimated Od itis probable the contingency will happen, but the amount cannot be reasonably estimated ut of ous page Next page Next activity ous activity ump to. Chapter-1-PPT-Slides- Introduction to the Conceptual Framework for Financial Reporting SIGNMENT - Intermediate ACcounting 1 -in touch AFR 10) a A F2 F5 F6 F7 F8 F9 F10 F11 F3 F4 GIO 144 &arrow_forward
- An overstatement of ending merchandise inventory in the current period results in an understatement of cost of goods sold in the current period. A. True B. Falsearrow_forwardExplain the appropriate accounting treatment required when an inventory error is discovered.arrow_forwardWhat can be the effect of inventory errors on the financial reports? How can these errors be corrected?arrow_forward
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