Principles of Financial Accounting · free preview
The Impact of Inventory Valuation Errors
An error in ending inventory flows into cost of goods sold, gross profit, and net income in the current period and reverses in the following period, so even honest count mistakes demand correction before statements are released.
1. The formula that transmits the error
The formula that transmits the error
2. An overstatement example
An overstatement example
3. The counterbalancing reversal
The counterbalancing reversal
4. Discovering errors in practice
Discovering errors in practice
5. Direction of the effect
Ending inventory is overstated by 5,000 dollars. What happens to current period net income?
6. Balance sheet consequence
An overstated ending inventory of 5,000 dollars affects the balance sheet in which way?
7. Counterbalancing meaning
Why are inventory errors called counterbalancing?
8. Consignment counting error
A company includes 8,000 dollars of consigned goods, which belong to a supplier, in its year-end count. Which statements are affected and how?
9. Error size from COGS difference
Reported cost of goods sold is 142,000 dollars. Correcting the ending inventory count raises cost of goods sold by 3,000 dollars. Compute the inventory overstatement in dollars, number only.
10. Reversal direction next year
This year ending inventory was overstated by 5,000 dollars, inflating this year's income. Compute next year's income error in dollars, ignoring taxes, and state the sign as a number.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free