EFFECT OF ERRORS IN
REPORTING INVENTORY
If ending inventory is reported
inaccurately, the following financial
statement data are incorrect.
On the income statement:
1. Cost of merchandise sold
2. Gross profit
3. Net income
On the balance sheet:
1. Ending inventory
2. Total current assets
3. Total assets
4. Owner's capital (due to the incorrect net income being added to
the
capital account)
INVENTORY ERRORS
Condensed financial statements
Company are shown below:
for
Jackson
Income Statement:
Sales ..................................................................
Cost of merchandise sold ...............................
Gross profit on sales .......................................
Operating expenses .........................................
Net income ........................................................
$37,000
19,000
$18,000
9,000
$ 9,000
Balance Sheet:
Assets:
Current assets ...........................................
Fixed assets ..............................................
Total assets ......................................................
$22,000
38,000
$60,000
Liabilities...........................................................
Owner’s equity .................................................
Total liabilities & owner’s equity ....................
$41,000
19,000
$60,000
After preparing these financial statements, Jackson
discovered that the physical inventory count was
incorrect, understating the year's ending inventory by
$4,000.
Requirement: Prepare corrected financial statements.
Next, determine whether each of the following items
were overstated or understated on the original
financial statements: (1) cost of merchandise sold, (2)
gross profit, (3) net income, (4) current assets, (5) total
assets, and (6) owner’s equity.
INVENTORY ERRORS
Corrected Financial Statements
for Jackson Company
Income Statement:
Sales .........................................................
Cost of merchandise sold.......................
Gross profit on sales ..............................
Operating expenses ................................
Net income ...............................................
$37,000
15,000
$22,000
9,000
$13,000
Balance Sheet:
Assets:
Current assets .....................................
Fixed assets ........................................
Total assets..............................................
$26,000
38,000
$64,000
Liabilities ..................................................
Owner’s equity.........................................
Total liabilities & owner’s equity ............
$41,000
23,000
$64,000