ABC Company misstates its ending inventory at the end of Year 1. ABC does not discover...
ABC Company misstates its ending inventory at the end of Year 1. ABC does not discover and correct the error until Year 3. The company’s annual report includes comparative financial statements for Years 2 and 3. (Ignore the impact on income taxes.) Which of the following statements about this error is true?
Check All That Apply
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A disclosure note is needed to describe the nature of the error.
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A disclosure note is needed to describe the impact of the error on net income, each line-item affected, and earnings per share.
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A journal entry to correct the error is needed.
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The Year 2 financial statements are not required to be retrospectively restated.
Homework Answers
Option B and C are true
B. A disclosure note is needed to describe the impact of the error on net income, each line-item affected, and earnings per share.
C. A journal entry to correct the error is needed.
If the inventory error is detected in the subsequent then, the Year 2 financial statements are required to be retrospectively restated to reflect the correction. Incorrect accounts due to error are required to be corrected with the help of journal entry. Moreover, it is necessary to include disclosure note that mentions the type of error and its effect on various accounts like net income, EPS, etc. after the correction of error.
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