For each of the following inventory errors occurring in 2011, determine the effe

Question

For each of the following inventory errors occurring in 2011, determine the effect of the error on 2011's cost of goods sold, net income, and retained earnings, using understated, overstated, or no effect. Assume that the error is not discovered until 2012 and that a periodic inventory system is used. Ignore income taxes.

Inventory errors costs of goods sold net income retained earnings

1. overstatement of ending inventory

2. Overstatement of

purchases

3. Understatement of

beginning inventory

4. Freight-in charges are

understated

5. Understatement of

ending inventory

6. Understatement of

purchases

7. Overstatement of

beginning inventory

8. Understatement of purchases

plus understatement of ending

inventory by the same amount

1. overstatement of ending inventory

Explanation / Answer

1. COGS understated N/I overstated R/E overstated 2. COGS overstated N/I understated R/E understated 3. COGS overstated N/I understated R/E understated 4.COGS understated N/I overstated R/E overstated 5. COGS overstated N/I Understated R/E understated 6. COGS understated N/I Overstated R/E Overstated 7. COGS understated N/I Overstated R/E Overstated 8.No effect

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