In 2013, Dripping Springs Industries%u2019 controller, Jack Johnson, discovered

Question

In 2013, Dripping Springs Industries%u2019 controller, Jack Johnson, discovered that under his predecessor the reported ending inventories for 2011 and 2012 had been overstated by $200,000 and $450,000, respectively.

A). Determine the effect of the errors on Retained Earnings at January 1, 2013. Label those numbers.

B) Discuss how these errors would be reported in the 2013 financial statements. Dripping Springs Industries has an effective tax rate of 27%.

C) Between 1997 and 2001, there were 919 restatements of financial statements due to accounting irregularities (38% were for improper revenue recognition and expensing). Provide at least four reasons why errors in financial reporting are such a problem.

Explanation / Answer

1. Ending inventories on 2011=200000

Ending inventories on 2012=450000

Difference in inventories=250000

So retailed earning increase based on new higher value of inventory.

2.As in inventories it has reported a large profit so tax rate will increase accordingly so these errors can be reported as error in application of GAAP(General accepted accounting pricinple).

3.Reasons for error in financial reporting are:

a)Due to problem in application of GAAP.

b)Employee benefits

c)Foreign currency

d)Consolidated and seprated financial statements.!!

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