For each of the following inventory errors occurring in 2018, determine the effe

Question

For each of the following inventory errors occurring in 2018, determine the effect of the error on 2018's cost of goods sold, net income, and retained earnings using understated (U), overstated (O), or no effect (NE). Assume that the error is not discovered until 2019 and that a periodic inventory system is used. Ignore income taxes. Cost of Net Retained Goods Sold Income Earnings 1. Overstatement of ending inventory 2. Overstatement of purchases 3. Understatement of beginning inventory 4. Freight-in charges are understated 5. Understatement of ending inventory 6. Understatement of purchases 7. Overstatement of beginning inventory 8. Understatement of purchases plus understatement of ending inventory by the same amount

Explanation / Answer

Cost of net Retained goods sold income earnings 1 understated overstated overstated 2 overstated understated understated 3 understated overstated overstated 4 understated overstated overstated 5 overstated understated understated 6 understated overstated overstated 7 overstated understated understated 8 NE NE. NE the cost of goods sold effect will be reverse on net income and retained earnings if cost of goods sold is overstated than net income and retained earnings will be understated

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