Share
Explore BrainMass

Effect on Inventory Errors on Financial Statements

Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether or not it would overstate(+), understate (-), or not affect(NA) the account.

See attached file for full problem description.

Effect on Inventory Errors on Financial Statements

The following income statement was prepared for Bell Company for the year 2006
Bell Company
Income Statement
For the year Ended 12/31/2007
Sales........................$69,000
Cost of good sold..........(38,000)

Gross margin.............. 30,360
Operating Expenses.........(9,100)

Net Income............ $21,000

During the year -end audit, the following errors were discovered.
1. A $1,400 payment for repairs was erroneously changed to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used)
2. Sales to customers for $2,400 at 12/31/06 were not recorded in the books for 2006. Also, the $1,344 cost of goods sold was not recorded. The error was not discovered in the physical count because the good had not been delivered to the customer.
3. A mathematical error was made in determining ending inventory. Ending inventory was understood by $1,200. (The inventory account was written down in error to the Cost of Goods Sold account)

Required
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether or not it would overstate(+), understate (-), or not affect(NA) the account.

PROBLEM 6-26A

Error No.1 Amount of Error Effect

Sales, 2002 NA NA
Ending Inventory, 12/31/02
Gross Margin, 2002
Beginning Inventory, 1/1/03
Cost of Goods Sold, 2002
Net Income, 2002
Retained Earnings, 12/31/02
Total Assets, 12/31/02

Error No. 2 Amount of Error Effect

Sales, 2002 -
Ending Inventory, 12/31/02
Gross Margin, 2002
Beginning Inventory, 1/1/03
Cost of Goods Sold, 2002
Net Income, 2002
Retained Earnings, 12/31/02
Total Assets, 12/31/02

Error No. 3 Amount of Error Effect

Sales, 2002 NA NA
Ending Inventory, 12/31/02
Gross Margin, 2002
Beginning Inventory, 1/1/03
Cost of Goods Sold, 2002
Net Income, 2002
Retained Earnings, 12/31/02
Total Assets, 12/31/02

Attachments

Solution Preview

Effect on Inventory Errors on Financial Statements

The following income statement was prepared for Bell Company for the year 2006
Bell Company
Income Statement
For the year Ended 12/31/2007
Sales........................$69,000
Cost of good sold..........(38,000)

Gross margin.............. 30,360
Operating Expenses.........(9,100)

Net Income............ $21,000

During the year -end audit, the following errors were discovered.
1. A $1,400 payment for repairs was erroneously changed to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used)
2. Sales to customers for $2,400 at 12/31/06 were not recorded in the books for 2006. Also, the $1,344 cost of goods sold was not recorded. The error was not discovered in the physical count because the good had ...

Solution Summary

The solution explains how to determine the effect on inventory errors on Financial Statements

$2.19