Question

As of the fiscal 2018 year-end, a company unknowingly overstated its ending inventory.

Required—Indicate how, if at all, the company’s overstatement of its fiscal 2018 ending inventory affected each of the financial statement elements listed below as follows:

• If the element was overstated as a result of the error, enter “OVER” in the blank provided.

• If the element was understated as a result of the error, enter “UNDER” in the blank provided.

• If the element was neither overstated or understated as a result of the error, i.e., if the element

  was correctly stated despite the error, enter “NONE” in the blank provided.

Income Statements:

	Fiscal 2018		Fiscal 2019
Sales Revenue
Cost of Goods Sold
Gross Profit
Income before Income Tax
Income Tax Expense
Net Income

Balance Sheet:

	Fiscal 2018		Fiscal 2019
Accounts Receivable
Inventory
Accounts Payable
Retained Earnings

Answer 1

the formula:

• Beginning inventory + purchases - ending inventory (Overstated) = cost of goods sold
• Sales - cost of goods sold = gross profit >>> net income

Fiscal 2018

Particulars	effect
Income statement
Sales revenue	NONE
Cost of goods sold	UNDER
Gross profit	OVER
Income before income tax	OVER
Income tax expense	NONE
net income	OVER
Balance sheet
Accounts receivable	NONE
Inventory	OVER
Accounts Payable	NONE
Retained earnings	OVER

Fiscal 2019:

the formula:

• Beginning inventory (overstated) + purchases - ending inventory = cost of goods sold
• Sales - cost of goods sold = gross profit >>> net income

Particulars	effect
Income statement
Sales revenue	NONE
Cost of goods sold	OVER
Gross profit	UNDER
Income before income tax	UNDER
Income tax expense	NONE
net income	UNDER
Balance sheet
Accounts receivable	NONE
Inventory	NONE
Accounts Payable	NONE
Retained earnings	NONE