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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
The following are independent errors made by a company that uses a periodic inventory system:
- a. failure to record a purchase of inventory on credit (however, inventory was properly counted at the end of the period)
- b. expensing the purchase of a machine
- c. failure to accrue wages
- d. failure to record an allowance for uncollectibles
- e. including collections in advance as revenue
- f. including payments in advance as expenses
- g. failure to accrue warranty costs
- h. discount on a note payable issued for purchase of a machine is ignored
- i. failure to record depreciation expense on assets purchased during the year
Required:
Next Level Indicate the effect of each of the preceding errors on the company’s assets, liabilities, shareholders’ equity, and net income in the year in which the error occurs. State whether the error causes an overstatement (+), an understatement (−), or no effect (NE).
Mention the effect of the given errors on the company’s assets, liabilities, shareholders, equity, and net income, in the year the error occurred.
Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.
Effect of the errors:
a.
Failure to record credit purchase:
Effect:
| Net Income | Assets | Liabilities | Shareholders’ Equity |
| + | NE | – | + |
Table (1)
Justification:
| Revenues | Expenses | Net Income | Assets | Liabilities | Shareholders’ Equity |
| Â | Understated expenses | Overstated income | Â | Understated accounts payable | Overstated retained earnings |
Table (2)
b.
Expensing the cost of machine:
Effect:
| Net Income | Assets | Liabilities | Shareholders’ Equity |
| – | – | NE | – |
Table (3)
Justification:
| Revenues | Expenses | Net Income | Assets | Liabilities | Shareholders’ Equity |
| Â | Overstated expenses | Understated income | Understated machine value | Â | Understated retained earnings |
Table (4)
c.
Failure to accrue wages:
Effect:
| Net Income | Assets | Liabilities | Shareholders’ Equity |
| + | NE | – | + |
Table (5)
Justification:
| Revenues | Expenses | Net Income | Assets | Liabilities | Shareholders’ Equity |
| Â | Understated expenses | Overstated income | Â | Understated wages payable | Overstated retained earnings |
Table (6)
d.
Failure to record allowance for uncollectible accounts:
Effect:
| Net Income | Assets | Liabilities | Shareholders’ Equity |
| + | + | NE | + |
Table (7)
Justification:
| Revenues | Expenses | Net Income | Assets | Liabilities | Shareholders’ Equity |
| Â | Understated expenses | Overstated income | Overstated accounts receivables | Â | Overstated retained earnings |
Table (8)
e.
Recorded unearned revenue as revenue:
Effect:
| Net Income | Assets | Liabilities | Shareholders’ Equity |
| + | NE | – | + |
Table (9)
Justification:
| Revenues | Expenses | Net Income | Assets | Liabilities | Shareholders’ Equity |
| Overstated revenues | Â | Overstated income | Â | Understated unearned revenue | Overstated retained earnings |
Table (10)
f...
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