Question

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Answer 1

What is the effect of this omission on the net income for the year as calculated when the books are closed?

The omission of goods in transit for $214000 will not affect the net income for the current year because on one side the purchases for the year was understated and on the other hand the ending inventory is also understated.

What is the effect on the company’s financial position as shown in its balance sheet?

For financial position. on one side the inventory was understated and on the other hand the accounts payable was also understated.

Is materiality a factor in determining whether an adjustment for this item should be made?

Here concept of the Materiality is a factor for determining whether an adjustment of this item can be considered as omission of large item will distort the current assets amount and also the current liabilities. So we can say this will influence current ratio to a considerable extent.