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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Borys Company’s periodic inventory at December 31, 2019, is understated by $10,000, but purchases are correct. Johnson correctly values its 2020 ending inventory. What is the effect of this error on Borys’s 2019 and 2020 financial statements?

To determine

Explain the effect of error on B’s 2019 and 2020 financial statements.

Explanation

Inventory errors: It refers to the errors that result in overstatement or understatement of ending inventory caused due to wrong physical inventory count or wrong price fixation of the inventory quantities. It also includes overstatement or understatement of purchases caused due to wrong inventory cut-off. These errors are rectified by reversing the original erroneous entry and recording the correct entry.

Effects of Inventory Errors

The following table shows the effect of inventory errors on Cost of Goods Sold and Income before income taxes:

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