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In: Accounting

For each of the following inventory errors occurring in 2018, determine the effect of the error...

For each of the following inventory errors occurring in 2018, determine the effect of the error on 2018's cost of goods sold, net income, and retained earnings using understated (U), overstated (O), or no effect (NE). Assume that the error is not discovered until 2019 and that a periodic inventory system is used. Ignore income taxes.

Cost of Net Retained
Goods Sold Income Earnings
1. Overstatement of ending inventory
2. Overstatement of purchases
3. Understatement of beginning inventory
4. Freight-in charges are understated
5. Understatement of ending inventory
6. Understatement of purchases
7. Overstatement of beginning inventory
8. Understatement of purchases plus understatement of ending inventory by the same amount

Solutions

Expert Solution

Cost of Net Retained
Goods Sold Income Earnings
1. Overstatement of ending inventory U O O
2. Overstatement of purchases O U U
3. Understatement of beginning inventory U O O
4. Freight-in charges are understated U O O
5. Understatement of ending inventory O U U
6. Understatement of purchases U O O
7. Overstatement of beginning inventory O U U
8. Understatement of purchases plus understatement of ending inventory by the same amount NE NE NE

Cost of goods sold and income/retained earnings move in the opposite directions. When cost of goods sold rises, income/retained earnings decrease and vice versa.

1. Overstatement of ending inventory - It leads to understated cost of goods sold and thus income and retained earnings are overstated.

2. Overstatement of purchases - It leads to overstated cost of goods sold and thus income and retained earnings are understated.

3. Understatement of beginning inventory - It leads to understated cost of goods sold and thus income and retained earnings are overstated.

4. Freight-in charges are understated - It leads to understated cost of goods sold and thus income and retained earnings are overstated.

5. Understatement of ending inventory - It leads to overstated cost of goods sold and thus income and retained earnings are understated.

6. Understatement of purchases - It leads to understated cost of goods sold and thus income and retained earnings are overstated.

7. Overstatement of beginning inventory - It leads to overstated cost of goods sold and thus income and retained earnings are understated.

8. Understatement of purchases plus understatement of ending inventory by the same amount - Due to this cost of goods sold increases and decreases by the same amount. Thus it has no affect on cost of goods sold. Income and retained earnings are also not affected.

ekkarill92 answered 3 months ago
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