Question

Inventory Errors Haywood Inc. reported the following information for 2018: Beginning inventory $25,000 Ending inventory 53,440 Sales revenue 1,000,000 Cost of goods sold 620,000 A physical count of inventory at the end of the year showed that ending inventory was actually $65,000.

Required: 1. What is the correct cost of goods sold and gross profit for 2018?

Assuming the error was not corrected, what is the effect on the statement of financial position at December 31, 2018?

Answer 1

Requirement 1

Calculation of Correct cost of goods sols
Incorrect Cost of goods sold	$ 620,000.00
Add: Incorrect Ending Inventory	$    53,440.00
Goods available for sale	$ 673,440.00
Less: Correct Ending Inventory	$    65,000.00
Actual Cost of goods sold	$ 608,440.00

Calculation of Correct Gross profit
Sales	$ 1,000,000.00
Actual Cost of goods sold	$      608,440.00
Correct Gross profit	$      391,560.00

Correct cost of goods sold=$608,440

Correct Gross profit= $391,560

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If error was not corrected then Asset side of balance sheet would be understated by $11560 (65000-53440) as Inventory would be understated.

Shareholder’s equity would be understated too. Understatement of gross profit ultimately leads to understatement of Net income and hence shareholder’s equity.

The balance sheet would still tally because understatement of asset side and liability and shareholder’s equity side would be the same amount. We can also say both sides of balance sheet would be understated if error was not corrected.