Question

During an audit of the inventory records of Winthrop Ltd for the year ended June 30, 2019, the auditor discovered that the ending inventory balance was overvalued by $180,000. On further investigation, it was discovered that the ending inventory for the previous year was correctly counted and valued, but that the inventory balance as at June 30, 2017, was undervalued by $500,000. Spurred on by the concern for errors undetected in previous periods, a thorough investigation was carried out as to the inventory values shown in the company’s financial statements during its five-year history. The following additional errors were detected.

1. As at June 30, 2016, inventory was overvalued by $50,000.
2. As at June 30, 2015, inventory was undervalued by $300,000.

Required:

1. Determine the effects that these errors have had on the company’s profit figures in each year, beginning in the year ended June 30, 2015.

Marks: 19

Under-valuations must be shown in brackets.

	2015	2016	2017	2018	2019
Beginning inventory	$	$	$	$	$
Ending inventory	$	$	$	$	$
Cost of Sales	$	$	$	$	$
Profit	$	$	$	$	$

2. Determine the effect of the inventory errors on the company’s balance sheet over the total time-period by recording below the cumulative impact on the company’s retained earnings in the specified years.

Marks: 10

Year	Overstatement or understatement?	Value of the effect on retained earnings
June 30, 2015		$
June 30, 2016		$
June 30, 2017		$
June 30, 2018		$
June 30, 2019		$

Answer 1

	Undervaluation in ending inventory increases cost of sales and reduces profit
	Overvaluation in ending inventory decreases cost of sales and increases profit
	Undervaluation in beginning inventory decreases cost of sales and increases profit
	Overvaluation in beginning inventory increases cost of sales and decreases profit
	Effects on the company's profit figures:
			2015	2016	2017	2018	2019
	Beginning inventory		0	-300000	50000	-500000	0
	Ending inventory		-300000	50000	-500000	0	180000
	Cost of sales		300000	-350000	550000	-500000	-180000
	Profit		-300000	350000	-550000	500000	180000
	Effect on retained earnings=Effect on profit
	Effect of the inventory errors on the company’s balance sheet:
	Year	Overstatement or understatement	Value of the effect on retained earnings
	June 30,2015	Understatement	300000
	June 30,2016	Overstatement	350000
	June 30,2017	Understatement	550000
	June 30,2018	Overstatement	500000
	June 30,2019	Overstatement	180000