Could you please you a formula to help to understand this kind of question?
Which direction should I think about first?
Thank you so much.
Homework Answers
Use the following equation for solving the problem:
Sales-purchases-opening inventory+closing inventory= Income
Case 1
If the current year ending inventory is understated it will decrease current year's income. Hence Current year income is understated.
As lower income is being carried forward into the retained earnings, the retained earnings will also be understated.
Now the closing inventory of current year will be opening inventory of next year. Now using the above equation it is evident that understated opening inventory will lead to overstated income
Case 2
Purchase goods not recorded will lead to
Current year income - overstated
retained earnings current year- overstated
next year income- understated
retained earnings- understated
( to understand simply think what will happen if a current year expense is charged to next year)
case 3
Goods purchased on FOB shipping point means we will get the ownership as soon as the goods are loaded on the ship.
Hence once goods are loaded we should record under purchases and inventory.
In the given case inventory is not recorded.
Current year income - understated
retained earnings current year- understated
next year income- overstated
Case 4
In this case there is no overstatement or understatement . Once the goods reached destination then it will be considered as sale.
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Could you please you a formula to help to understand this kind
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