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Effects of an Error in Ending Inventory
Waymire Company prepared the partial income statements presented below for 2019 and 2018.
During 2020, Waymire’s accountant discovered that ending inventory for 2018 had been understated by $6,500.
Required:
1. Prepare corrected income statements for 2019 and 2018.
2. Prepare a schedule showing each financial statement item affected by the error and the amount of the error for that item (ignore the effect of income taxes). Indicate whether each error is an overstatement (+) or an understatement (-).
Concept introduction:
Cost of goods Available for sale:
The Cost of goods Available for sale is the sum of beginning finished goods inventory and the cost of goods manufactured. The formula to calculate the Cost of goods Available for sale is as follows:
Cost of Goods Available for sale = Beginning inventory + Cost of Goods manufactured
Cost of Goods sold:
The Cost of goods sold is the difference of Cost of goods Available for sale and the Ending finished goods inventory. The formula to calculate the Cost of goods sold is as follows:
Cost of Goods sold = Cost of goods available for sale − Ending finished goods inventory
Or
Cost of Goods sold = Beginning inventory + Purchases − Ending inventory
Requirement 1:
To prepare:
The correct income statements for the year 2019 and 2018.
The correct income statements for the year 2019 and 2018 are prepared as follows:
| $ 2,019 | $ 2,018 | |
| Sales revenue (A) | $ 538,200 | $ 483,700 |
| Beginning Inventory (B) | $ 45,800 | $ 32,100 |
| Purchases (C) | $ 343,200 | $ 292,700 |
| Cost of Goods available for sale (D) = (B+C) | $ 389,000 | $ 324,800 |
| En... |
Concept introduction:
Cost of goods Available for sale:
The Cost of goods Available for sale is the sum of beginning finished goods inventory and the cost of goods manufactured. The formula to calculate the Cost of goods Available for sale is as follows:
Cost of Goods Available for sale = Beginning inventory + Cost of Goods manufactured
Cost of Goods sold:
The Cost of goods sold is the difference of Cost of goods Available for sale and the Ending finished goods inventory. The formula to calculate the Cost of goods sold is as follows:
Cost of Goods sold = Cost of goods available for sale − Ending finished goods inventory
Or
Cost of Goods sold = Beginning inventory + Purchases − Ending inventory
Requirement 2:
To prepare:
A schedule showing the effect of error on various items of the financial statement.
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