Effect of Errors in Physical Inventory Fonda Motorcyde Shop sells motorcydles, A
ID: 2341443 • Letter: E
Question
Effect of Errors in Physical Inventory Fonda Motorcyde Shop sells motorcydles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $227,890 instead of the correct amount of $218,770. Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop. Balance Sheet Items Merchandise Inventory Current Assets Total Assets Owner's Equity b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8. Overstated/ Understated Amount Overstated/Understated Amount Income Statement Items Cost of Merchandise Sold Gross Profit Net Income c. If uncorrected, what would be the effect of the error on the 20Y9 income statement? Amount Understated/ OverstatedExplanation / Answer
Incorrect value recorded in books
227890
Actual inventory value
-218770
Difference
9120
Amount of inventory over stated Which result into under stated of cost of goods sold and over stated of gross profit.
Balance sheet items
Effect
Amount
Remarks
Merchandise inventory
Overstated
9120
As per above explanation
Current assets
Overstated
9120
Overstated of merchandise inventory would be impact on overstated on current assets.
Total assets
Overstated
9120
Overstated of current assets would be impact on overstated on total assets.
Owner's equity
Overstated
9120
Overstated of net income would be impact on overstated on owner's equity.
Effect on 2018
Income statements items
Amount
Remarks
Cost of merchandise sold
Understated
9120
As per above explanation
Gross profit
Overstated
9120
As per above explanation
Net income
Overstated
9120
Overstated of gross profit would be impact on overstated on net income.
Effect on 2019
Income statements items
Amount
Remarks
Cost of merchandise sold
Overstated
9120
Last year, understated of cost of goods sold would be impact as overstated of current year's cost of goods sold
Gross profit
Understated
9120
Overstated of current year's cost of goods sold would be under stated of gross profit.
Net income
Understated
9120
Understated of current year's gross profit would be impact on overstated on current year's net income.
If uncorrected of error, then effect on balance sheet would be correct, since 20y8 inventory errors revers in 20y9.
Physical inventory valued on 2019 is corrected, but beginning inventory balance incorrect which results on understated of cost of goods sold. It means errors revers in 20y9.
Incorrect value recorded in books
227890
Actual inventory value
-218770
Difference
9120
Amount of inventory over stated Which result into under stated of cost of goods sold and over stated of gross profit.
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