Question

Exer LO 2 Effects of inventory error Assume that the ending inventory of a merchandising firm is overstated by $20,000. Required: a. By how much and in what direction (overstated or understated) will the firm's cost of goods sold be misstated? b. If this error is not corrected, what effect will it have on the subsequent period's operating income? c. If this error is not corrected, what effect will it have on the total operating income of the two periods (the period in which there is an error and the subse- quent period) combined?

Answer 1

Date : (a) Cost of Goods sold means - Opening Inventory & - Net purchas a t Direct Expenses - cloring Inventory of closing Inventory és amistated by $2,000, it means cost of Goods sold would decrease by $20,0TD____ If this error ů not corrected, the subsequent periods opening stock will increase by $ 20,000 and cost of Goods sold will also increase by $20,000 so operating income will get reduced by $20,000 If this error ů not corrected, Total operating income of current period will get increas by $20,000 because cost u reduced 1 But subsequent perlod income will get reduced by $20,ove because cost will increase. o