Sparky, Inc. follows a calendar-year end. Its financial statements for the years 2018 and 2017 contained...
Sparky, Inc. follows a calendar-year end. Its financial statements for the years 2018 and 2017 contained errors as follows:
- Ending Inventory for 2017 was understated by $18,000
- Ending Inventory for 2018 was overstated by $33,000
No correcting entries were made at December 31, 2018. Determine the following:
a. Indicate the effect on 2018 Net Income (ignore taxes. Indicate O for Overstated; U for Understated; or NE for No Error. If your answer is overstated by $4,000, record your answer as O4000.)
b. Indicate the effect on 2018 Ending Retained Earnings (enter your answer same as above).
|
Effect on 2018 Net Income |
Effect on Ending Retained Earnings at December 31, 2018 |
|
$ |
$ |
Homework Answers
| Error | Effect on 2018 Net income | Effect on Ending Retained earnings at December 31 2018 | Explanation |
| Ending inventory for 2017 was understated by $18000 | O 18000 | O 18000 |
Ending inventory of 2017 is opening inventory of 2018. If opening
inventory is understated, gross profit is overstated. Hence, net
income is overstated. If net income is overstated, opening retailed earnings get overstated and thereby closing retained earnings also get overstated |
| Ending inventory for 2018 was overstated by $ 33000 | O 33000 | O 33000 |
Ending inventory of 2018 is closing stock. If closing stock is
overstated, gross profit is overstated. Hence, net income is
overstated. If net income is overstated, retained earnings will also be overstated |
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