6 Hermani Company understated its ending inventory balance at the end of the yea

Question

6 Hermani Company understated its ending inventory balance at the end of the year by S4,500. Which one of the following is a result of the error? A) Net income for the year will be understated. B) Cost of goods sold for the year will be understated. C) Gross profit for the year will be overstated D) Merchandise purchases for the year will be understated E) Ending inventory will be overstated. 7. Why is depreciation expense recognized? A) To provide a better estimate of the market value of the depreciated assets B) So that the balance sheet value of plant assets will more accurately reflecet the replacement C) To ensure that cash will be available at the end of the asset's useful life in order to replace it cost of the assets D) To match the cost of the asset against revenue using a reasonable allocation method 8. Wild Wind Cafe owns a sports bar in Portland. During a Super Bowl football game, one of the customers punched a hole in the wall when his favorite team fumbled the ball. Wild Wind Café paid $150 to repair the hole. How should Wild Wind Café account for the cost of repair? A) Add the cost to the Building' account B) Recognize the cost as repair and maintenance expense C) No recording is necessary since the customer will be charged for the damage D) Recognize the cost as a reduction of sales revenue 9. On the first day of the year, Zayda Company sold equipment for less than its book value. Which of the following is necessary to record the transaction? A) The Equipment account is decreased B) The Accumulated Depreciation-Equipment account is decreased C) A Loss on Sale of Asset is recorded on the Income Statement D) All of the above 10. On January 1, Haraldson Natural purchased a forklift for $28,200 cash. Haraldson paid freight charges of $600 to the trucking company to deliver the forklift to its warehouse. The estimated salvage value and useful life of the forklift are $2,600 and 4 years, respectively. Under the straight-line method, what is the book value of the equipment as of December 31 Year 3? A)S 9,150 B) S15,600 C)S 6,500 D)S 8,950

Explanation / Answer

Dear student, only one question is allowed at a time. I am answering the first question

6)

A)

Net Income takes into account the value of closing Inventory. So, if closing inventory is understated, Net income will also be understated

B)

Cost of goods sold = Opening Inventory + Purchases – Closing Inventory

So, if closing inventory is understated, cost of goods sold as per above formula will be overstated as less inventory value will be deducted in calculation of cost of goods sold

C)

When cost of goods sold is overstated, Gross profit which is Net Sales – Cost of goods sold will be understated due to higher value of cost of goods sold

D)

Purchase value of merchandise is not affected by valuation of closing Inventory

E)

As it has been given that ending inventory is understated, it cannot be overstated at the same time

So, as per above discussion, option A is the correct option

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