Question

1. Effect of Errors in Physical Inventory

   Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $722,640 instead of the correct amount of $744,320.

   Enter all amounts as positive numbers.

   a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

   Balance Sheet Items	Understated/Overstated	Amount
   Merchandise Inventory		$
   Current Assets
   Total Assets
   Owner's Equity

   b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

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

   c. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

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

   d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

   1. The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.
   2. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error overstates the beginning inventory in20Y3.
   3. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error understates the beginning inventory in 20Y3.

Answer 1

Missouri River Supply incorrectly counted its inventory as $722,640 instead of the correct amount of $744,320. So the ending inventory is understated.

a.

Merchandise Inventory - Understated

Current Assets - Understated (Since ending inventory part of current assets)

Total Assets - Understated (Since current assets part of tota assets)

Owner's Equity - Understated (Since net income understated)

b.

Cost of Merchandise Sold - Ovestated (Since COGS = Opening + Purchases - Closing)

Gross Profit - Understated (Since COGS Overstated)

Net Income - Understated (Since Gross profit is understated)

c.

Cost of Merchandise Sold - Understated (Since Opening stock understated)

Gross Profit - Overstated (Since COGS understated)

Net Income - Overstated (Since Gross profit is overstated)

d.

3.The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error understates the beginning inventory in 20Y3.