Inventory Errors Analysis
Evaluate the effects of the following inventory errors on the income statement and balance
sheet for the years indicated. Use the following abbreviations:
O=overstated
U=understated
NE=no effect.
Remember that EI errors carry to the beginning of next year, and that the B/S items are affected by
EI (assets), A/Payable (Liab) and NI (Retained Earnings in equity).
Analyze the effect of the indicated error on the following items:
COGS
A. Due to an error
in the 2014 year end count,
ending inventory was understated, and the error went
2014: ______
uncorrected in 2015. All
other amounts were correct. 2015: ______
B. Assume instead
that a purchase on
account should have been
recorded in December of
2014, but was not
recorded until Jan. 2015.
All other amounts were
correct.
2014:
______
2015: ______
Net
Income
Balance sheet amounts at 12/31
Assets
Liabilities
Equity
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
C. Assume instead
that a purchase on
account should have been
recorded in December of
2014: ______ ______
______
______
______
2014, but was not
recorded until Jan. 2015.
2015: ______ ______
______
______
______
ALSO, assume the ending
inventory at 12/31/2014 was understated,
because the inventory was in transit (FOB shipping point) and was mistakenly excluded from the
count. All other amounts were correct.
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Solution, including the analysis of the components of the COGS equation.
Part A: EI understated in 2014.
BI + Purch - EI = COGS
2014
U
O
2015
U
U
NI
U
O
Assets = Liab.
U
NE
NE
NE
+ SE
U
NE
Part B: Purchase not recorded until 2015.
BI + Purch - EI = COGS
2014
U
U
2015
O
O
NI
O
U
Assets = Liab.
NE
U
NE
NE
+ SE
O
NE
Part C: Purchase not recorded until 2015 AND EI understated at end of 2014.
BI + Purch - EI = COGS
NI
Assets = Liab. + SE
2014
U
U
NE
NE
U
U
NE
2015
U
O
NE
NE
NE
NE
NE
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