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 $623,730 instead of the correct amount of $642,440.

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		$
Current Assets		$
Total Assets		$
Stockholders’ Equity		$

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		$
Gross Profit		$
Net Income		$

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		$
Gross Profit		$
Net Income		$

d. If uncorrected, what would be the effects of the error on the December 31, 20Y9, balance sheet?

1. The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9.
2. The income for 20Y9 would be understated.
3. The current assets in 20Y9 would be overstated.
4. The current assets in 20Y9 would be understated.

Answer 1

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Madison
Workings	Amount $
Correct amount	642,440.00
Inventory count	623,730.00
Difference	18,710.00
Answer a
Balance Sheet Items	Understated/Overstated	Amount
Inventory	Understated	18,710.00
Current Assets	Understated	18,710.00
Total Assets	Understated	18,710.00
Stockholders’ Equity	Understated	18,710.00
Answer b
Income Statement Items	Understated/Overstated	Amount
Cost of Goods Sold	Overstated	18,710.00
Gross Profit	Understated	18,710.00
Net Income	Understated	18,710.00
Answer c
Income Statement Items	Understated/Overstated	Amount
Cost of Goods Sold	Understated	18,710.00
Gross Profit	Overstated	18,710.00
Net Income	Overstated	18,710.00

Answer d

The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9.