Question

2. For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. (20%) Code: 0 = item is overstated U = item is understated NA = item is not affected

Answer 1

Solution to Question

Sl No.	Events	Assets	Equity	Cost of Goods sold	Net income	Reasons
1	A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.	O	O	U	O	When goods (closing stock) are counted twice, 1. Assets will be double therefore overstated. 2. Increase in Closing stock will increase profits therefore equity will also increase. 3. Cost of goods sold will decrease since closing stock will increase 4. Net Income will increase since closing goods are recoreded twice.
2	The ending inventory in the previous year was overstated.	U	U	O	U	When ending invetory in the previous year was overstated (opening stock overstated), 1. Assets will be understated since opening stock are overstated. 2. Increase in opening stock will decrease profits therefore equity will also decrease in current year. 3. Cost of goods sold will increase since opening stock will increase 4. Net Income will decrease since opening goods are overstated.
3	Goods purchased on account in december of the current year and shipped FOB shipping point were recoreded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by december 31.	NA	U	O	U	Since goods have not yet arrived and recorded as purchase, therefore assets will not change and since in is recorded as purchase profit will be understated.
4	Goods purchased on account in december of the current year and shipped FOB destination were recoreded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by december 31.	NA	U	O	U	Since goods have not yet arrived and recorded as purchase, therefore assets will not change and since in is recorded as purchase profit will be understated.
5	The internal auditors discovered that the ending inventory in the previous period was understated $ 15,000 and the ending inventory in the current was overstated $ 25,000.	O	O	U	O	1. Assets will be overstated since opening stock are understated & closing stock is overstated. 2. Decrease in opening stock & increase in closing stock will increase profits therefore equity will also increase in current year. 3. Cost of goods sold will decrease since opening stock will dercrease & closing stock will increase. 4. Net Income will increase since opening goods are undersated & closing stock are overstated.