Question

Identify the $ value impact from the errors below on ending inventory, revenue, net income and ending retained earnings in the current year. Identify if the errors are an overstatement or an understatement. Each scenario is an independent case, the year end is December 31.

$1,500 of goods held on consignment were included in the inventory count and recorded in the purchases account.

Merchandise received during the year costing $4,600 was missed in the inventory count and therefore not included in ending inventory.

Included in the physical count were inventory items billed to a customer f.o.b. shipping point on December 31, 2020. These tools had a cost of $37,000 and were billed at $57,000. The shipment was on our loading dock waiting to be picked up by the common carrier.

Goods in transit with a cost of $1,000 shipped FOB destination by the supplier were recorded as a purchase but were excluded from ending inventory.

You can use the following template for each scenario:

Current year
Beginning Inventory

+ Purchases

= Available goods

- Ending Inventory

Cost of Goods Sold



Sales

- Cost of Goods Sold

Net Income



R/E, beg

+ Net Income

R/E, end

Answer 1

Scenerio 1 :

$1,500 of goods held on consignment were included in the inventory count and recorded in the purchases account.

Solution : Goods held on the consignment basis are the goods that are belongs to the second party and being in the capacity of agent , it lies in my godown . Therefore, we cannot take such goods in our purchases and also not in our closing inventory.

In such a case , year end inventory is overstated by $1500.

There is no impact on the revenue as the purchases and the inventory are recorded erroneously not the sales amount .

There is no impact on the net income as both the purchases as well the as closing inventory is overstated by $1500

There is no impact on retained earning as there is no impact on income.

Current year
Beginning Inventory	Actual – without any error
+ Purchases	Overstated by $1500
= Available goods	Overstated by $1500
- Ending Inventory	Overstated by $1500
Cost of Goods Sold	No impact
Sales	Actual – without any error
- Cost of Goods Sold	No impact
Net Income	No impact
R/E, beg	Actual – without any error
+ Net Income	No impact
R/E, end	No impact

           
Scenerio 2 :

Merchandise received during the year costing $4,600 was missed in the inventory count and therefore not included in ending inventory.

Solution : Goods received but not included in the inventory. This will have following impact :

In such a case , year end inventory is understated by $4600.

There is no impact on the revenue

There is understated of the net income by $4600 since the amount is included in the total purchases but is excluded in the physical count of inventory.

Similarly, retained earning is understated by $4600.

Current year
Beginning Inventory	Actual – without any error
+ Purchases	Actual – without any error
= Available goods	Actual – without any error
- Ending Inventory	Understated by $4600
Cost of Goods Sold	Overstated by $4600
Sales	Actual – without any error
- Cost of Goods Sold	Overstated by $4600
Net Income	Understated by $4600
R/E, beg	Actual – without any error
+ Net Income	Understated by $4600
R/E, end	Understated by $4600

Scenerio 3:

Included in the physical count were inventory items billed to a customer f.o.b. shipping point on December 31, 2020. These tools had a cost of $37,000 and were billed at $57,000. The shipment was on our loading dock waiting to be picked up by the common carrier.

Solution : Tools have been billed but are not shipped. As per AS-4 , revenue Recognition , we cannot recognize the revenue till the ownership and risk and rewards of the goods have been transferred to the buyer. In this case, this if FOB shipment, revenue will be recognized when it will cross the custom frontierof the country. Since , the goods are lying at the dock , revenue cannot be recognize.

In such a case , year end inventory is correctly taken as ownership of goods is not transferred

Revenue is overstated by $57000

Net Income is Overstated by $57000

Similarly, retained earning is Overstated by $57000.

Current year
Beginning Inventory	Actual – without any error
+ Purchases	Actual – without any error
= Available goods	Actual – without any error
- Ending Inventory	Actual – without any error
Cost of Goods Sold	Actual – without any error
Sales	Overstated by $57000
- Cost of Goods Sold	Actual – without any error
Net Income	Overstated by $57000
R/E, beg	Actual – without any error
+ Net Income	Overstated by $57000
R/E, end	Overstated by $57000

Scenerio 4:

Goods in transit with a cost of $1,000 shipped FOB destination by the supplier were recorded as a purchase but were excluded from ending inventory:

Solution : The goods in transit are not included in the year ending inventory. Its is FOB Shipment , so it will form the part of purchases though the actual goods are not yet received It will have following Impact :

In such a case , year end inventory is understated by $1,000

There is no impact on the revenue

There is understated of the net income by $1,000

Similarly, retained earning is understated by $1000.

Current year
Beginning Inventory	Actual – without any error
+ Purchases	Actual – without any error
= Available goods	Actual – without any error
- Ending Inventory	Understated by $1000
Cost of Goods Sold	Overstated by $1000
Sales	Actual – without any error
- Cost of Goods Sold	Overstated by $1000
Net Income	Understated by $1000
R/E, beg	Actual – without any error
+ Net Income	Understated by $1000
R/E, end	Understated by $1000