Zenkins Inc. made errors in their 2014 and 2015 recordings that affected their m

Question

Zenkins Inc. made errors in their 2014 and 2015 recordings that affected their merchandise inventory. During 2014 the ending inventory was overstated $5,000 and purchase returns & allowances for 2014 were understated $1,200. During 2015 purchases were overstated $3,500 and the ending 2015 merchandise inventory was understated $2,000. Assume that the above is the only errors made and that none of these errors were corrected during 2014 and 2015.

Required:

1) What is the dollar amount effect on the cost of goods sold and gross profit for 2014?

2) What is the dollar amount effect on gross profit and retained earnings for 2015?

Explanation / Answer

Amounts in $ 1) Dollar amount effect on cost of goods sold and gross profit for 2014 Cost of Goods Sold Ending inventory overstated COGS understated 5000 Purchase Returns understated COGS overstated -1200 Cost of Goods Sold understated by 3800 Gross Profit overstated by 3800 2) Dollar amount effect on gross profit and retained earnings for 2015 Gross Profit Purchases Overstated Gross Profit understated 3500 Ending Inventory Understated Gross Profit overstated -2000 Gross Profit understated by 1500 Retained Earnings understated by 1500

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