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understatement of inventory

Inventory on Dec 31,2004 is understated by 66,000
inventory on dec 31, 2005 is overstated by 30,000

year sold
2004 2005 2006
a.cost of good 715,000 847000 770000
b.net income 220,000 275000 231000
c.total current
assets 1,15,000 1,265,000 1,100,000
d.total equity 1,287,000 1,430,000 1,232,000

for each financial statement a,b,c,d prepare a table similar to the following

figure 2004 2005 2006
reported amount
Adj for error 12/31/04
corrected amount

2. what is the error in total net income for the combined three year period resulting from the inventory errors?

3. Explain why the understatement of inventory by 66,000 at then end of 2004 results in an understatement of equity by the same amount in that year.

Solution Preview

Since COGS=Beginning inventory + Purchase - Ending inventory
- Inventory on Dec 31,2004 is understated by 66,000, and this results in an overstatement in COGS in year 2004, understatement in net income, understatement in total current assets, and understatement in total equity.

It also results in understatement in COGS in year 2005, overstatement in net income, ...

Solution Summary

The understatement of inventory is studied.