A company reported Net Income of $1,000,000 for 2015 and $1,000,000 for 2016. Af

Question

A company reported Net Income of $1,000,000 for 2015 and $1,000,000 for 2016. After the books have been closed for 2017, it was discovered that the ending inventory for 2015 was overstated by $20,000. Tell the effect that the error had on each of the following:

a. Cost of Goods Sold for 2015 as originally reported

b. Net Income for 2015 as originally reported

c. Cost of Goods Sold for 2016 as originally reported

d. Net Income for 2016 as originally reported

e. Retained Earnings as of the end of 2016

Explanation / Answer

(a) Cost of Goods Sold for 2015 as originally reported

Cost of goods sold Formula   = Opening stock + Purchases + Direct Expenses – Closing Stock

If the closing Stock is overstated by $ 20,000, Then the Cost of goods sold will be Understated by $ 20,000     

(b) Net Income for 2015 as originally reported

If the closing Stock is overstated by $ 20,000, Then the net Income will also be Overstated to the extent of $ 20,000

(c ) Cost of Goods Sold for 2016 as originally reported

Cost of goods sold Formula   = Opening stock + Purchases + Direct Expenses – Closing Stock

The closing stock of 2015 will be the Opening stock of 2016, So If the Opening stock Is overstated by $ 20,000, Then the Cost of goods sold for the year 2016 would also be overstated by $20,000

(d). Net Income for 2016 as originally reported

Closing inventory of 2015 will be the opening inventory of 2016, So the Increase in the value of opening stock of $ 20000 will result in decrease in the value of Net Income to the extent of $ 20000

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