Class Demonstration Problems on Inventory Errors:
1. Bekins Inc. began operations on January 1, 1995. The following data pertains to the company’s first two years in
business:
Reported Amount
Correct Amount
Inventory
Dec, 31, 1995
$20,000
$30,000
Dec. 31, 1996
$35,000
$35,000
Net Income –after taxes
For 1995
For 1995
$60,000
$66,000
?
?
Retained Earnings
Dec. 31, 1995
Dec. 31, 1996
$60,000
$126,000
?
?
During 1995 and 1996, the company’s income tax expense rate was 40% and the company declared no dividends.
Compute the correct amount for each of the following variables:
a. Net income for 1995
b. Net Income for 1996
c. Retained Earnings, December 31, 1995
d. Retained Earnings, December 31, 1996
2. Beretta Company uses a periodic inventory system and sells its merchandise for 100% above cost. The following
events occurred near the end of the first year of operations (year1):
a. The company failed to record the credit purchase of goods to which it received legal title during year 1.
Although the goods had not been sold by year end, the company did not include them int its ending inventory.
b. The company failed to record the credit sales of goods to which it surrendered legal title during year 1. The
company included the goods in its ending inventory.
c. The company included certain goods to which it had not yet received legal title in its ending inventory. The
company did not record a purchase of these goods.
d. The company recorded a credit purchase of goods to which it received legal title during year 1. Although the
goods had not been sold by year end, the company did not include them in its ending inventory.
e. The company recorded a credit purchase of goods to which it did not receive legal title during year 1. These
goods were included in the company’s ending inventory.
Complete the matrix below. At the intersection of each row and column, indicate the effect of the event on the
financial statement variable at the end of year 1. Treat each event independently. Use the code: O=overstated,
U=understated, NE=No effect.
Event
a
b
c
d
e
f
Total
Total
Revenues
Expenses
(Sales
(COGS)
revenue)
Total
Total
Net
Total Stockholder's
Assets
Liabilities
Income (Inventory,
Equity
(A/P)
A/R)
Class Demonstration Problems on Inventory Errors:
1. Bekins Inc. began operations on January 1, 1995. The following data pertains to the company’s first two years in
business:
Reported Amount
Correct Amount
Inventory
Dec, 31, 1995
$20,000
$30,000
is understated by 10,000
Dec. 31, 1996
$35,000
$35,000
BI is understated, EI is correct
Net Income –after taxes
For 1995
For 1995
$60,000
$66,000
$66,000
$60,000
Retained Earnings
Dec. 31, 1995
Dec. 31, 1996
$60,000
$126,000
$66,000
$126,000
During 1995 and 1996, the company’s income tax expense rate was 40% and the company declared no dividends.
Compute the correct amount for each of the following variables:
a. Net income for 1995
b. Net Income for 1996
c. Retained Earnings, December 31, 1995
d. Retained Earnings, December 31, 1996
2. Beretta Company uses a periodic inventory system and sells its merchandise for 100% above cost. The following
events occurred near the end of the first year of operations (year1):
a. The company failed to record the credit purchase of goods to which it received legal title during year 1.
Although the goods had not been sold by year end, the company did not include them int its ending inventory.
b. The company failed to record the credit sales of goods to which it surrendered legal title during year 1. The
company included the goods in its ending inventory.
c. The company included certain goods to which it had not yet received legal title in its ending inventory. The
company did not record a purchase of these goods.
d. The company recorded a credit purchase of goods to which it received legal title during year 1. Although the
goods had not been sold by year end, the company did not include them in its ending inventory.
e. The company recorded a credit purchase of goods to which it did not receive legal title during year 1. These
goods were included in the company’s ending inventory.
Complete the matrix below. At the intersection of each row and column, indicate the effect of the event on the
financial statement variable at the end of year 1. Treat each event independently. Use the code: O=overstated,
U=understated, NE=No effect.
Total
Total
Revenues
Event
Expenses
(Sales
(COGS)
revenue)
NE
NE
a
U
U
b
NE
U
c
NE
O
d
NE
NE
e
O
O
f
**A/R under by $10,000
E/I over by
5,000
Assets under by 5,000
Total
Total
Net
Assets
Total Stockholder's
Liabilities
Income (Inventory,
Equity
(A/P)
A/R)
NE
U
U
NE
U
U**
NE
U
O
O
NE
O
U
U
NE
U
NE
O
O
NE
O
O
NE
O
Multiple Choice on Inventory Errors:
1. A company failed to record a valid sale of merchandise that had been shipped to a customer of the end of the
current year. The merchandise had been properly excluded from inventory at the end of the current year. This error
would
a. Understate total expenses for the current year
b. Overstate net income for the current year
c. Not affect net income for the current year
d. Not affect total revenue for the current year
e. Understate total assets at the end of the current year.
2. The following errors have just been found to exist with regard to the accounting records of the RED Corporation
for the year ended December 31:
Beginning inventory was understated by $5,000 and ending inventory was overstated by $6,000. Ignore income
taxes and potential prior period adjustments. Reported net income for the year before any adjustments for the errors
above was 20,000. The corrected pre income tax net income for RED Corporation for the year just ended is
a. $21,000
b. $9,000
c. $19,000
d. $31,000
e. $14,000
3. On December 31, Johnson Corporation sold an account and shipped merchandise with a list price of $75,000 to
Gibson Company. The terms of the sale were n/30, FOB shipping point. Due to confusion about the shipping
terms, the sale was not recorded until January and the merchandise, sold at a markup of 25% on cost, was included
in the inventory on December 31. Johnson uses a periodic inventory system. As a result, Johnson’s income before
income taxes for the year ended December 31 would be
a. Understated by $15,000
b. Understated by $75,000
c. Understated by $18,750
d. Understated by $560,000
e. None of the above
4. During the process of preparing a company’s 1983 financial statements, the accountant discovered that beginning
inventory had been understated by $12,000, purchases had been understated by $17,000 and ending inventory had
been overstated by $8,000. These errors will cause the 1983 income from continuing operations before taxes to be
a. $21,000 understated
b. $21,000 overstated
c. $37,000 understated
d. $37,000 overstated
5. The following errors are made by a company that uses the periodic inventory system
a. A purchase on account is omitted from the purchases account and the ending inventory.
b. A purchase on account is omitted from the purchases account, but the ending inventory is correct
c. The ending inventory is overstated, but purchases are correct.
Required: Indicate the effect of the preceding errors on the income statement and the balance sheet of the current
and succeeding years.
6. Goods costing $750 are sold for $1,000 at the end of year 1, but the sale is recorded in year 2. The goods were
included in the ending inventory at the end of year 1. The most likely effect of this error is
a. Net income for year 1 was understated by $1,000
b. Net income for year 2 was overstated by $250
c. Beginning inventory for year 2 is understated by $750
d. Net income for year 1 was overstated by $250
7. In each of the situations described below, indicate the effect of the error on the various elements of financial
statements prepared at the end of the current year.
Situation
no record made of goods
purchased on credit and
received on December 31.
Goods omitted from
inventory
Made sale in late
December; goods were
delivered on December 31
but were also included in
inventory on December 31
In taking the physical
inventory, some goods in a
warehouse were
overlooked
A purchase made late in
year was recorded properly
on the books, but goods
were not included in the
ending inventory
Revenues
Costs
and/or
expenses
Net
income
Assets
Liabilities
Owner's
equity
Multiple Choice on Inventory Errors:
1. A company failed to record a valid sale of merchandise that had been shipped to a customer of the end of the
current year. The merchandise had been properly excluded from inventory at the end of the current year. This error
would
a. Understate total expenses for the current year
Sales are understated
b. Overstate net income for the current year
EI is fairly stated
c. Not affect net income for the current year
not recorded: A/R
XX
d. Not affect total revenue for the current year
Sales
XX
e. Understate total assets at the end of the current year.
2. The following errors have just been found to exist with regard to the accounting records of the RED Corporation
for the year ended December 31:
Beginning inventory was understated by $5,000 and ending inventory was overstated by $6,000. Ignore income
taxes and potential prior period adjustments. Reported net income for the year before any adjustments for the errors
above was 20,000. The corrected pre income tax net income for RED Corporation for the year just ended is
a. $21,000
b. $9,000
c. $19,000
d. $31,000
e. $14,000
3. On December 31, Johnson Corporation sold an account and shipped merchandise with a list price of $75,000 to
Gibson Company. The terms of the sale were n/30, FOB shipping point. Due to confusion about the shipping
terms, the sale was not recorded until January and the merchandise, sold at a markup of 25% on cost, was included
in the inventory on December 31. Johnson uses a periodic inventory system. As a result, Johnson’s income before
income taxes for the year ended December 31 would be
a. Understated by $15,000
b. Understated by $75,000
c. Understated by $18,750
d. Understated by $560,000
e. None of the above
4. During the process of preparing a company’s 1983 financial statements, the accountant discovered that beginning
inventory had been understated by $12,000, purchases had been understated by $17,000 and ending inventory had
been overstated by $8,000. These errors will cause the 1983 income from continuing operations before taxes to be
a. $21,000 understated
b. $21,000 overstated
c. $37,000 understated
d. $37,000 overstated
5. The following errors are made by a company that uses the periodic inventory system
a. A purchase on account is omitted from the purchases account and the ending inventory.
b. A purchase on account is omitted from the purchases account, but the ending inventory is correct
c. The ending inventory is overstated, but purchases are correct.
Required: Indicate the effect of the preceding errors on the income statement and the balance sheet of the current
and succeeding years.
6. Goods costing $750 are sold for $1,000 at the end of year 1, but the sale is recorded in year 2. The goods were
included in the ending inventory at the end of year 1. The most likely effect of this error is
a. Net Income for year 1 was understated by $1,000
b. Net income for year 2 was overstated by $250
c. Beginning inventory for year 2 is understated by $750
d. Net income for year 1 was overstated by $250
7. In each of the situations described below, indicate the effect of the error on the various elements of financial
statements prepared at the end of the current year.
Situation
Revenues
Costs
and/or
expenses
Net
income
Assets
Liabilities
Owner's
equity
no record made of goods
purchased on credit and
received on December 31.
Goods omitted from
inventory
NE
NE
NE
U
U
NE
Made sale in late
December; goods were
delivered on December 31
but were also included in
inventory on December 31
NE
U
O
O
NE
O
In taking the physical
inventory, some goods in a
warehouse were
overlooked
NE
O
U
U
NE
U
A purchase made late in
year was recorded properly
on the books, but goods
were not included in the
ending inventory
NE
O
U
U
NE
U