Question

effect of Errors in Physical Inventory

Madison River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y8, Madison incorrectly counted its inventory as $773,020 instead of the correct amount of $796,210.

Enter all amounts as positive numbers.

a. State the effects of the error on the December 31, 20Y8, balance sheet of Madison River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Inventory		$
Current Assets		$
Total Assets		$
Stockholders’ Equity		$

b. State the effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8.

Income Statement Items	Overstated/Understated	Amount
Cost of Goods Sold		$
Gross Profit		$
Net Income		$

c. If uncorrected, what would be the effects of the error on the 20Y9 income statement?

Income Statement Items	Overstated / Understated	Amount
Cost of Goods Sold		$
Gross Profit		$
Net Income		$

d. If uncorrected, what would be the effects of the error on the December 31, 20Y9, balance sheet?

The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9.

The income for 20Y9 would be understated.

The current assets in 20Y9 would be overstated.

The current assets in 20Y9 would be understated.

Answer 1

Requirement a

Effects of the error on the December 31, 20Y8, balance sheet of Madison River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Inventory	Understated	$23,190.00
Current Assets	Understated	$23,190.00
Total Assets	Understated	$23,190.00
Stockholders’ Equity	Understated	$23,190.00

When Inventory ending inventory is understated then net profit will also be understated and id net profit is understated then shareholder’s equity will also be understated.

Requirement b

Effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8.

Income Statement Items	Overstated/Understated	Amount
Cost of Goods Sold	Overstated	$23,190.00
Gross Profit	Understated	$23,190.00
Net Income	Understated	$23,190.00

Requirement c

If uncorrected, Effects of the error on the 20Y9 income statement

Income Statement Items	Overstated / Understated	Amount
Cost of Goods Sold	Understated	$23,190.00
Gross Profit	Overstated	$23,190.00
Net Income	Overstated	$23,190.00

When ending inventory of 2018 is understated then beginning inventory of 2019 will also be understated. Beginning understated inventory causes cost of goods sold to be lower than the actual amount.

Requirement d

If uncorrected, The effects of the error on the December 31, 20Y9, balance sheet,

Correct option --- The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9.

Explanation

Balance sheet in 2019 will be correct because inventory is counted every year and ending value of 2019 inventory will be as per count.