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 Income after taxes For 1995 $60,000? For 1995 $66,000? Retained Earnings Dec. 31, 1995 $60,000? Dec. 31, 1996 $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. income for 1995 b. 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. a b c d e f Event (Sales revenue) Expenses (COGS) Income (Inventory, A/R) (A/P) Stockholder's Equity
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 Income after taxes For 1995 $60,000 $66,000 For 1995 $66,000 $60,000 Retained Earnings Dec. 31, 1995 $60,000 $66,000 Dec. 31, 1996 $126,000 $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. income for 1995 b. 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 (Sales revenue) Expenses (COGS) Income (Inventory, A/R) (A/P) Stockholder's Equity a NE NE NE U U NE b U U U U** NE U c NE U O O NE O d NE O U U NE U e NE NE NE O O NE f O O O O NE O **A/R under by $10,000 E/I over by 5,000 under by 5,000
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. income for year 1 was understated by $1,000 b. income for year 2 was overstated by $250 c. Beginning inventory for year 2 is understated by $750 d. 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 Costs and/or expenses income Owner's equity 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
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. Income for year 1 was understated by $1,000 b. income for year 2 was overstated by $250 c. Beginning inventory for year 2 is understated by $750 d. 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 Costs and/or expenses income Owner's equity 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 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 NE U O O NE O NE O U U NE U NE O U U NE U