6.4 Inventory Erros

Question 1

if inventory is understated then how does it impact:
1) cogs
2) gross profit
3) incoem befort income tax
4) re

Answer 1

overstate
under
under
under

Question 2

if inventory is overstated then how does it impact:
1) cogs
2) gross profit
3) incoem befort income tax
4) re

Answer 2

under
over
over
over

Question 3

, an error in ending inventory and cost of goods sold at the end of the current period will have a reverse effect on net income of the next accounting period i

Answer 3

, an error in ending inventory and cost of goods sold at the end of the current period will have a reverse effect on net income of the next accounting period i

Question 4

Errors Made When Recording Goods in Transit at Period End Another type of error—recording the purchase of inventory in the wrong time period—can occur when a company incorrectly records goods in transit at the end of the accounting period. This usually happens when the company fails to record purchased goods that it owns but has not yet received. These errors will cause the Inventory and Accounts Payable accounts to be misstated but will have no effect on the statement of income.For example, assume a company purchased inventory with a cost of $5,000 on account. The terms were FOB shipping point, and the goods were in transit at the company’s 2024 year end. The company’s accountant did not record the purchase because they misunderstood the shipping terms. As the goods were in transit when the inventory count was performed, they were not included in the count balance. The effect of this error would be that both the Inventory account and the Accounts Payable account would be understated at the end of 2024. The company’s statement of income would not be affected. Also note that, once the purchase is recorded in 2025, this type of error will reverse. These effects are summarized in Illustration 6.23.

Answer 4

Errors Made When Recording Goods in Transit at Period End Another type of error—recording the purchase of inventory in the wrong time period—can occur when a company incorrectly records goods in transit at the end of the accounting period. This usually happens when the company fails to record purchased goods that it owns but has not yet received. These errors will cause the Inventory and Accounts Payable accounts to be misstated but will have no effect on the statement of income.For example, assume a company purchased inventory with a cost of $5,000 on account. The terms were FOB shipping point, and the goods were in transit at the company’s 2024 year end. The company’s accountant did not record the purchase because they misunderstood the shipping terms. As the goods were in transit when the inventory count was performed, they were not included in the count balance. The effect of this error would be that both the Inventory account and the Accounts Payable account would be understated at the end of 2024. The company’s statement of income would not be affected. Also note that, once the purchase is recorded in 2025, this type of error will reverse. These effects are summarized in Illustration 6.23.

Question 5

if inventory is recorded too early then how does it impact
1) inventory
2) a/p
3) cogs and net income
4) re

Answer 5

over
over
unaffected
unaffected

Question 6

if inventory is recorded too late then how does it impact
1) inventory
2) a/p
3) cogs and net income
4) re

Answer 6

under
under
unaffected
unaffected

Question 7

how do you check that you have the error identified correctly?

Answer 7

use the accounting equation! because this equation will remain in balance even when the erorr occurs

Question 8

why do the errors of incorrectly coutning invneotry not lead to long term problems?

Answer 8

• because in next year inventory will be counted correctly
  -because in the SE, understated net income will be cancelled out by overstated net income

Question 9

2 types of inventory errors

Answer 9

1) errors made when determining the cost of inventory
2)errors made when recording goods in transti at period end

Question 10

how do errors happen when recording goods in transit at period end

Question 11

what accounts do errrors made when recording goods in transit affeect?

Answer 11

inventory and accounts payable

Question 12

example of goods in transit:

company orders good with $5000 at year end and they were in transit!! accountant did not record this- how odes this impact accounts?

Answer 12

inderstated inventory and a/p

Question 13

if purchase of inventory is recorded too early?
1) inventory
2) a/p
3) cogs, net income
40 re

Answer 13

overs tated
oversttated

unaffected
unaffected

Question 14

if purchase of inventory is recorded too early?
1) inventory
2) a/p
3) cogs, net income
40 re

Answer 14

understated
understated
unaffectunaffect

Question 15

do inventory purchase errors get fixed over itme?

Answer 15

yes!! as oson as inventory is recorded appropriately