Question

Pieter Uways & Rekan Registered Publie Accountants Name Date of Brth yunvor mwinor 3 rnin Corporation had S580.000 nventory was priced at cost. In February year 2. it was determned that the inventory cost was owerstated by $50 000 000 in ewentory, which was based on a phrysical count at December 31, year . The Juate from Uw total GPA gpod time m pany. I intera which was Indicane the lets of the iwentory overstalement in the year 1 and year 2 fnancial staements try compiening the folowing table. Mark each item overstate, understate, or OK Year 1 Effects Overstate Understate Year 2 Effects Overstate UnderstateO inventory on balance sheet Cost of goods sold opy of m my skill waiting f Retained earnings 4 The audltors of Wasis Company have found the follawing errors in the compamy's accourting records indicate how the error wil affect the current years francal statements by enoorgsn·0in the and "U' in the column for understate Retained Net Assets Liabilities Earning Income OCi a. Wasis fails to record a sale on account for $8,000 b. The inventory was miscounted at year-end and overstated by $5,000 c. Wasis fails to record depreciation expense of $3.500 for the year d. The company receives a utility bil for $400 on December 29, but fails to record the e. Available-for-sale securities were not marked to market. Later analysis reveals that the securities in creased in value by year. Wasis does not elect the fair value option for any of ts available-for-sale securities f. Wasis fails to accrue wages of $17,000 at the end of the year Trading securities were not marked to market. Later analysis reveals that the securities declined in value by $8,000 as of the end o the current year g.

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Answer 1

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Question 3		Year 1			Year 2
		Overstate	Understate	ok	Overstate	Understate	ok
Inventory on Balance Sheet		Overstate			Overstate
Cost of Goods sold			Understate			Overstate
		Since Ending inventory is overstated, there will lesser amount available to be charged in COGS			Since Beginning inventory is overstated, there will more amount available to be charged in COGS
Net Income		Overstate				Understate
		Reduced COGS, will increase Net Income			Higher COGS, will reduce Net Income
Retained Earning		Overstate					OK
		Higher net income will increase RE			Higher Net income in Year 1 and Lower Net income in Year 2, will make RE at par
Question 4
		Assets		Liabilities		Retained Earning		Net Income		OCI
		O	U	O	U	O	U	O	U	O	U
a
			U				U		U
			Accounts Receiacable				Net Income		Sale
b		O					O	O
		Inventory					Net Income	COGS understate
c		O					O	O
		Net Assets					Net Income	Exp not recorded
d					U		O	O
					Accounts Payable		Net Income	Exp not recorded
e			U								U*
			asset not increased								not marked to fair value
f					U		O	O
					Wages Payable		Net Income	Exp not recorded
g		O					O	O**
		asset not decreased					Net Income	Loss not recorded
*Available for sale securities: Unrealized loss/gain is shown in OCI statement
**Trading securities: Unrealized loss/gain shown in Income statement