Question

Effect of Errors in Physical Inventory Madison River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking o its physical inventory on December 31, 2048, Madison incorrectly counted its inventory as $444,650 instead of ti correct amount of $457,990. Enter all amounts as positive numbers. a. State the effects of the error on the December 31, 2018, balance sheet of Madison River Supply. Balance Sheet Items Understated/Overstated Amount Inventory Current Assets Total Assets Stockholders' Equity b. State the effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8. Income Statement Items Overstated/Understated Amount Cost of Goods Sold Gross Profit Mome

Answer 1

Difference Ending inventory= (457990-444650) = 13340

13340 Ending Inventory understated

Effects of Understated inventory

a. Balance sheet
Balance sheet Items	overstated / understated	Amount
Inventory	understated	13340
Current Asset	understated	13340
Total Asset	understated	13340
Stockholders Equity	understated	13340
b. income statement
Income statement items	overstated / understated	Amount
Cost of goods sold	Overstated	13340
Gross profit	understated	13340
Net income	understated	13340

Inventory comes under Current Assets side of the balance sheet so that if inventory understated, Current assets and total assets also understated which is results in understated of Shareholders equity.

Following Example is given for Understated Ending Inventory effect on balance sheet and income statement

		Balance sheet (Correct)	Income Statement (Correct)	Balance sheet (Error)	Income Statement (Error)
a	Sales (Assume)		500,000		500,000
b	Beginning Inventory (Assume)	100,000		100,000
c	Purchases	400,000		400,000
d	Goods available for Sale (b+c)	500,000		500,000
e	Ending inventory (As per Question )	457990		444650
f	Cost of Goods sold (d-e)		42,010		55,350
g	Gross profit (a-f)		457,990		444,650
h	Expenses (assume)		100000		100000
I	Net income (g-h)		357,990		344,650