Question

Ayayai Limited makes the following errors during the current year. Each error is an independent case. 1. Ending inventory is overstated by $1,020, but purchases are recorded correctly. 2. Both ending inventory and a purchase on account are understated by the same amount. (Assume this purchase of $1,500 was recorded in the following year.) 3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase of $850 was recorded in the following year.) Indicate the effect of each error on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the following year. (Do not leave any answer field blank. Enter for amounts) Current Year Subsequent Year • by s 1. Working capital by s Current ratio Retained earnings by s by $ Net ince ne/(loss) by s by s 2. Working capital by s by s Current ratio

Answer 1

Case 1 Ending Inventory is overstated by $ 1,020 Subsequent Year Current Year Working Capital Current ratio Retained Earnings Net Income/(Loss) Increased by $ Increased Increased by $ Increased by $ 1,020 Decreased by 1,020 Decreased 1,020 Decreased by 1,020 by 1,020 1,020 Both ending inventory and purchases on account are understated by $ 1,500 Case 2 Subsequent Year Current Year Working Capital Current ratio Retained Earnings Net Income/(Loss) No change by $ Increased Decreased by $ Increased by $ No Change by $ Decreased 1,500 Increased 1,500 Decreased by 1,500 by 1,500 Case 3 Ending inventory is correct and purchases on account is understated by $ 850 Subsequent Year 850 Decreased by $ Current Year Working Capital Current ratio Retained Earnings Net Income/(Loss) Increased by $ Increased 850 Decreased No Change by $ No change by $ No Change by $ No Change by $