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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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Indicate the effect of each of the following errors on the following balance sheet and income statement items for the current and succeeding years: beginning inventory, ending inventory, accounts payable, retained earnings, purchases, cost of goods sold, net income, and earnings per share.

  1. a. The ending inventory is overstated.
  2. b. Merchandise purchased on account and received was not recorded in the purchases account until the succeeding year although the item was included in inventory of the current year.
  3. c. Merchandise purchased on account and shipped FOB shipping point was not recorded in either the purchases account or the ending inventory.
  4. d. The ending inventory was understated as a result of the exclusion of goods sent out on consignment.

To determine

Show the effect of the given errors on the balance sheet and income statement items for the current year and succeeding years.

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...

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