INVENTORY ERRORS
 Why are inventory errors caused?
o Mistakes in counting or pricing.
o Recognizing the timing of the transfer of legal title for goods in
transit.
 These mistakes can result in errors in determining:
o Beginning inventory
o Cost of goods purchased
o Ending inventory
o COGS
 Errors in COGS will affect the income statement.
 Errors in ending inventory will affect the balance sheet, both in
ending inventory and the capital section.
Income Statement Effects
 If there is any error in either beginning inventory, cost of goods
purchased, or ending inventory, COGS will be incorrect.
Beginning Inventory + Cost of Goods Purchased – Ending Inventory = COGS
 Once the error on COGS is determined, then we can determine the
effect of this error on the income statement.
 An error in COGS has the opposite effect on gross profit and profit.
 Since the ending inventory of one period becomes the beginning
inventory of the next period, an error in ending inventory of the
current period will have a reverse effect on the profit of the next
period.
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2
Balance Sheet Effects
Assets = Liabilities + Owner’s Equity
Nature of Error
nderstate
Ending
Inventory
Overstate
Ending
Inventory
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Assets
=
Liabilities
+
Owner’s
Equity
Understate
No Effect
Understate
Overstate
No Effect
Overstate