Question

During an audit of the inventory records of Winthrop Ltd for the year ended June 30, 2019, the auditor discovered that the ending inventory balance was overvalued by $180,000. On further investigation, it was discovered that the ending inventory for the previous year was correctly counted and valued, but that the inventory balance as at June 30, 2017, was undervalued by $500,000. Spurred on by the concern for errors undetected in previous periods, a thorough investigation was carried out as to the inventory values shown in the company’s financial statements during its five-year history. The following additional errors were detected.

1. As at June 30, 2016, inventory was overvalued by $50,000.
2. As at June 30, 2015, inventory was undervalued by $300,000.

Required:

1. Determine the effects that these errors have had on the company’s profit figures in each year, beginning in the year ended June 30, 2015.

Under-valuations must be shown in brackets.

	2015	2016	2017	2018	2019
Beginning inventory	$	$	$	$	$
Ending inventory	$	$	$	$	$
Cost of Sales	$	$	$	$	$
Profit	$	$	$	$	$

2. Determine the effect of the inventory errors on the company’s balance sheet over the total time-period by recording below the cumulative impact on the company’s retained earnings in the specified years.

Year	Overstatement or understatement?	Value of the effect on retained earnings
June 30, 2015		$
June 30, 2016		$
June 30, 2017		$
June 30, 2018		$
June 30, 2019		$

Answer 1