Question

In: Accounting

Communication Activity BYP6.4 You are the controller of Small Toys Inc. Mutahir Kazmi, the president, recently...

Communication Activity

BYP6.4 You are the controller of Small Toys Inc. Mutahir Kazmi, the president, recently mentioned to you that he found an error in the 2020 financial statements that he believes has now corrected itself. In discussions with the purchasing department, Mutahir determined that the 2020 ending inventory was understated by $1 million. However, the 2021 ending inventory is correct. Mutahir assumes that 2021 profit is correct and comments to you, “What happened has happened—there's no point in worrying about it now.”

Instructions

You conclude that Mutahir is wrong. Write a brief, tactful email to him that clarifies the situation.

Solutions

Expert Solution

Hi Mr Mutahir,

I have gone through the inventory details & financial results of 2020 and 2021 and I found that what you said is not true. There are some missing points.

In the financial statements for 2020, the inventory Value has understated by $1 million and it directly reduced the gross profit and automatically impact the net profit also by same amount. So this error has reduced the profit in the financial statements of 2020 by $1million. It already affected the dividend policy and tax computations.

In the year 2021, the book value of opening inventory was $1million less than the actual inventory Value. Even then the closing Inventory shows a correct value, then either the inventory value has been corrected or there was a doubtful misappropriation of the Inventory. This need to be checked confirmed immediately.

So in this situation we can not simply sit by saying that what happened has happened. There is something to worry. So request you to kindly look into this matter.

ekkarill92 answered 2 years ago
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