BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
82 views

Errors A company that uses the periodic inventory system makes the following errors:

  1. 1. It omits a purchase on credit from the purchases account and the ending inventory.
  2. 2. It omits a purchase on credit from the purchases account, but the ending inventory is correct.
  3. 3. It overstates the ending inventory, but purchases arc correct.

Required:

Indicate the effect of the preceding errors on the income statement and the balance sheet of the current and succeeding years.

To determine

Show the effect of the preceding errors on the income statement and balance sheet for the current year and on the following year.

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 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:

Serial NoDetailsCost of goods soldNet incomeRetained earnings

1.

Overstatement of ending inventoryUnderstatedOverstatedOverstated
2.Overstatement of purchasesOverstatedUnderstatedUnderstated
3.Understatement of beginning inventoryUnderstatedOverstatedOverstated
4.Freight-in charges are understatedUnderstatedOverstatedOverstated
5.Understatement of ending inventoryOverstatedUnderstatedUnderstated
6.Understatement of purchasesUnderstatedOverstatedOverstated
7.Overstatement of beginning inventoryOverstatedUnderstatedUnderstated
8.Understatement of purchases plus understatement of ending inventory by the same amountNo effectNo effectNo effect

Table (1)

Table (2)

Purchases on credit amount are omitted from the purchase account and ending inventory account.

Current year:

The current year income is correct because company omits purchase amount from purchase account and the ending inventory. Hence, this will counterbalance each other account.

However, the purchase made on credit (accounts payable) and ending inventory would be overstated on the balance sheet.

Following year:

When the purchase is recorded in the following year, the amount of income will be correct due to the overstatement of purchases and understatement of beginning inventory...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Describe the economic logic behind the theory of purchasing-power parity.

Principles of Macroeconomics (MindTap Course List)

Who are some of the basic users of financial statements, and how do they use them?

Fundamentals of Financial Management (MindTap Course List)

Why is it necessary to journalize and post adjusting entries?

College Accounting (Book Only): A Career Approach

Indicate whether the following instruments are examples of money market or capital market securities. a. U.S. T...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

State and solve the diamondwater paradox.

Economics (MindTap Course List)