Question

Effect of Errors in Physical Inventory

Madison River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y8, Madison incorrectly counted its inventory as $352,700 instead of the correct amount of $363,280.

Enter all amounts as positive numbers.

a. State the effects of the error on the December 31, 20Y8, balance sheet of Madison River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Inventory	Understated	$
Current Assets	Understated	$
Total Assets	Understated	$
Stockholders’ Equity	Understated	$

b. State the effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8.

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

c. If uncorrected, what would be the effects of the error on the 20Y9 income statement?

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

Answer 1

a.)	Balance Sheet Items	Understated/Overstated	Amount $
	Inventory	Understated	10,580	=363280-352700
	Current Assets	Understated	10,580
	Total Assets	Understated	10,580
	Stockholders’ Equity	Understated	10,580
b.)	Income Statement Items	Overstated/Understated	Amount $
	Cost of Goods Sold	Overstated	10,580
	Gross Profit	Understated	10,580
	Net Income	Understated	10,580
c.)	Income Statement Items	Overstated / Understated	Amount $
	Cost of Goods Sold	Understated	10,580
	Gross Profit	Overstated	10,580
	Net Income	Overstated	10,580