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Cornerstones of Financial Accounti...

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Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Effects of an Inventory Error

The income statements for Picard Company for the 3 years ending in 2019 appear below.

Chapter 6, Problem 71BPSB, Effects of an Inventory Error The income statements for Picard Company for the 3 years ending in

During 2019, Picard discovered that the 2017 ending inventory had been misstated due to the following two transactions being recorded incorrectly:

a. Inventory costing $37,000 that was returned to the manufacturer (a purchase return) was not recorded. The items were included in ending inventory.

b. A credit purchase of inventory made on August 30, 2017, for $12,800 was recorded twice. The goods were shipped F.O.B. shipping point and were shipped on September 5, 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?

To determine

(a)

Concept introduction:

The errors in the recording of inventories in the books may be due to many reasons like omission of entry or recording it twice which will either understate or overstate the inventories. This will affect the gross profit as well as the net profit of the company.

To calculate:

If the inventory of 2017 is understated or overstated and the amount of such error.

Explanation

The omission of the inventory of $37,000, which is a purchase return,means that the closing inventory is overstated by the same amount.

The amount of $12,800 has been recorded twice in the books. This means that the closing inventory is overstated by the same amount

To determine

(b)

Concept introduction:

The errors in the recording of inventories in the books may be due to many reasons like omission of entry or recording it twice which will either understate or overstate the inventories. This will affect the gross profit as well as the net profit of the company.

To rectify:

The income statement for all three years.

To determine

(c)

Concept introduction:

The errors in the recording of inventories in the books may be due to many reasons like omission of entry or recording it twice which will either understate or overstate the inventories. This will affect the gross profit as well as the net profit of the company.

To calculate:

The impact of error in inventory in 2017 on the cumulative net income.

To determine

(d)

Concept introduction:

The errors in the recording of inventories in the books may be due to many reasons like omission of entry or recording it twice which will either understate or overstate the inventories. This will affect the gross profit as well as the net profit of the company.

To state:

The reasonsfor unaffected net income of 2019.

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