Use the following to answer questions 39 –40 MATCH… For each of the following in
ID: 2541704 • Letter: U
Question
Use the following to answer questions 39 –40
MATCH… For each of the following independent situations, fill in the blanks to indicate the effect of the error on each of the various financial statement items. Assume that each of the companies uses a periodic inventory system. Indicate:
(A) an understatement
(B) an overstatement or
(C) no effect, correct
Balance Sheet
Income Statement
Error
Ending
Inventory
Retained Earnings
Cost of Goods Sold
Net Income
39.
Understated EI in year 1, affect on items in year 1.
a.
b.
c.
d.
40.
Understated EI in year 1, affect on items in year 2.
a.
b.
c.
d.
Balance Sheet
Income Statement
Error
Ending
Inventory
Retained Earnings
Cost of Goods Sold
Net Income
39.
Understated EI in year 1, affect on items in year 1.
a.
b.
c.
d.
40.
Understated EI in year 1, affect on items in year 2.
a.
b.
c.
d.
Explanation / Answer
Balance Sheet
Income Statement
Error
Ending
Inventory
Retained Earnings
Cost of Goods Sold
Net Income
39.
Understated EI in year 1, affect on items in year 1.
a. An understatement
b. An understatement
c. An overstatement
d. An understatement
40.
Understated EI in year 1, affect on items in year 2.
a. No effect
b. An overstatement
c. An understatement
d. An overstatement
Cost of goods sold = Beginning inventory + purchases - ending inventory. The overstatement or underststement of Inventory effects Cost of goods sold.
As there is change in Cost of goods sold, Net income changes and retained earnings changes because of net income.
The physical count at the end of the year determines the ending inventory under periodic inventory system and the understated ending inventory is expected to be reversed at the end of year 2.
Balance Sheet
Income Statement
Error
Ending
Inventory
Retained Earnings
Cost of Goods Sold
Net Income
39.
Understated EI in year 1, affect on items in year 1.
a. An understatement
b. An understatement
c. An overstatement
d. An understatement
40.
Understated EI in year 1, affect on items in year 2.
a. No effect
b. An overstatement
c. An understatement
d. An overstatement
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