At December 31, 2016, Nash Corporation reported current assets of $389,780 and c

Question

At December 31, 2016, Nash Corporation reported current assets of $389,780 and current liabilities of $189,600. The following items may have been recorded incorrectly.

1. Goods purchased costing $20,180 were shipped f.o.b. shipping point by a supplier on December 28. Nash received and recorded the invoice on December 29, 2016, but the goods were not included in Nash’s physical count of inventory because they were not received until January 4, 2017. Ans: 2.05

2. Goods purchased costing $15,740 were shipped f.o.b. destination by a supplier on December 26. Nash received and recorded the invoice on December 31, but the goods were not included in Nash’s 2016 physical count of inventory because they were not received until January 2, 2017.

3. Goods held on consignment from Claudia Kishi Company were included in Nash’s December 31, 2016, physical count of inventory at $13,700. 4. Freight-in of $2,750 was debited to advertising expense on December 28, 2016.

Explanation / Answer

1

Current ratio based on the Nash corporation information

389780/189600

2.055802

2

Current ratio after the corrections made

(389780+20180-13700+2750)/(189600-15740)

399010/173860

2.295007

3

Event

Effect of error

Adjust income(increase/decrease)

1

Understatement of ending inventory

Decrease in net income

20180

2

Overstatement of purchases

Decrease in net income

15740

3

Overstatement of ending inventory

Increase in net income

-13700

4

Overstatement of advertising expense

0

Understatement of cost of goods sold

22220

1

Current ratio based on the Nash corporation information

389780/189600

2.055802

2

Current ratio after the corrections made

(389780+20180-13700+2750)/(189600-15740)

399010/173860

2.295007

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