Question

F. INVENTORY ERRORS AND ESTIMATION (10 Marks) For each of the independent events listed below. using a perpetual inventory system, analyze the mos on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: o item is overstated U = item is understated NA item is not affected Owner's Cost of Net Assets Equity Goods Sold Income Events O M O The ending inventory in the previous period was overstated O 2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. The internal auditors discovered that the ending inventory in the previous period was understated $ 15,000 and that the ending inventory in the current period was overstated $ 25,000. 12 s Scanned with CamScanner

Answer 1

	1	Cost of Good Sold =Beginning Inventory +Purchase-Ending Inventory
		Beginning Inventory of current period is overstated
		Cost of Goods sold will be overstated
		Net Income will be Understated
	2	The Ending Inventory will be overstated
		Cost of goods sold will be understated
		Net Income will be Over stated
		Owners Equity will be Overstated
	3	It is FOB destination contract
		Property in goods will be passed on reaching destination, which occurred in next year
		Hence , it should not be included in current year's inventory Count
		Ending inventory is correctly stated
		Purchase is overstated
		Consequently, Cost of goods sold will be overstated
		Net Income will be Understated
		Owners Equity will be Understated
	4	It is FOB shipping point contract
		Property in goods will be passed on at shipping point, which occurred in current year
		Purchase is correctly stated
		Ending Inventory is understated
		Consequently, Cost of goods sold will be overstated
		Net Income will be Understated
		Owners Equity will be Understated
	5	Beginning inventory in current period is understated by $15000
		Ending Inventory in current year is overstated by $20000
		Cost of goods sold is understated by $15000 because of beginning inventory
		Cost of goods sold is understated by $20000 because of Ending inventory
		Net Effect:
		Cost of goods sold understated by $35000
		Net Income will be Over stated
		Owners Equity will be Overstated
			Assets	Owners Equity	Cost of goods sold	Net Income
	1	Ending Inventory in previous period overstated	NA	NA	O	U
	2	Goods being counted twice	O	O	U	O
	3	Goods Purchased and shipped FOB destination	NA	U	O	U
	4	Goods Purchased and shipped FOB shipping point	U	U	O	U
	5	Previous Period ending inventory understated and current period overstated	O	O	U	O