During an audit of the inventory records of Winthrop Ltd for the year ended June 30, 2019, the auditor discovered that the ending inventory balance was overvalued by $180,000. On further investigation, it was discovered that the ending inventory for the previous year was correctly counted and valued, but that the inventory balance as at June 30, 2017, was undervalued by $500,000. Spurred on by the concern for errors undetected in previous periods, a thorough investigation was carried out as to the inventory values shown in the company’s financial statements during its five-year history. The following additional errors were detected.
Required:
Marks: 19
Under-valuations must be shown in brackets.
2015 |
2016 |
2017 |
2018 |
2019 |
|
Beginning inventory |
$ |
$ |
$ |
$ |
$ |
Ending inventory |
$ |
$ |
$ |
$ |
$ |
Cost of Sales |
$ |
$ |
$ |
$ |
$ |
Profit |
$ |
$ |
$ |
$ |
$ |
Marks: 10
Year |
Overstatement or understatement? |
Value of the effect on retained earnings |
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June 30, 2015 |
$ |
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June 30, 2016 |
$ |
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June 30, 2017 |
$ |
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June 30, 2018 |
$ |
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June 30, 2019 |
$ During an audit of the inventory records of Winthrop Ltd for the year ended June 30, 2019, the auditor discovered that the ending inventory balance was overvalued by $180,000. On further investigation, it was discovered that the ending inventory for the previous year was correctly counted and valued, but that the inventory balance as at June 30, 2017, was undervalued by $500,000. Spurred on by the concern for errors undetected in previous periods, a thorough investigation was carried out as to the inventory values shown in the company’s financial statements during its five-year history. The following additional errors were detected.
Required:
Marks: 19 Under-valuations must be shown in brackets.
Marks: 10
|
Undervaluation in ending inventory increases cost of sales and reduces profit | ||||||||
Overvaluation in ending inventory decreases cost of sales and increases profit | ||||||||
Undervaluation in beginning inventory decreases cost of sales and increases profit | ||||||||
Overvaluation in beginning inventory increases cost of sales and decreases profit | ||||||||
Effects on the company's profit figures: | ||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||
Beginning inventory | 0 | -300000 | 50000 | -500000 | 0 | |||
Ending inventory | -300000 | 50000 | -500000 | 0 | 180000 | |||
Cost of sales | 300000 | -350000 | 550000 | -500000 | -180000 | |||
Profit | -300000 | 350000 | -550000 | 500000 | 180000 | |||
Effect on retained earnings=Effect on profit | ||||||||
Effect of the inventory errors on the company’s balance sheet: | ||||||||
Year | Overstatement or understatement | Value of the effect on retained earnings | ||||||
June 30,2015 | Understatement | 300000 | ||||||
June 30,2016 | Overstatement | 350000 | ||||||
June 30,2017 | Understatement | 550000 | ||||||
June 30,2018 | Overstatement | 500000 | ||||||
June 30,2019 | Overstatement | 180000 | ||||||
During an audit of the inventory records of Winthrop Ltd for the year ended June 30,...
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