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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Effect of errors in physical inventory

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.

  1. a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.
  2. b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.
  3. c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?
  4. d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

(a)

To determine

Inventory error:

Inventory errors are sometimes caused by making mistake, in physical count, in pricing the inventory correctly, or in recognizing the transfer of title for the goods in transit. These inventory errors affect both the income statement as well as the balance sheet.

To indicate: the effect of misstatement on FM shop in their balance sheet.

Explanation

The inventory at the year-end is overstated. When inventory is overstated, current assets would also be overstated...

(b)

To determine

To indicate: the effect of misstatement on FM shop in their income statement.

(c)

To determine

To indicate: the effect on FM shop in their income statement on the next year if the mistake is uncorrected.

(d)

To determine

To indicate: the effect on FM shop in their balance sheet on the next year if the mistake is uncorrected.

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