The Management of Dayton Ltd

question 25

Essay

The management of Dayton Ltd. erroneously understated its inventory during 2010 by $28,000. Using the information below and assuming there are no distributions of retained earnings: (1) present a brief analysis with the accurate numbers and the numbers in error and (2) explain whether retained earnings would be overstated, understated, or be indifferent to the error at the end of 2011.
2010 Sales: $60,000
2010 Purchases: $50,000
2010 Cost of Goods Sold (before inventory error) $20,000
2011 Sales: $210,000
2011 Purchases: $60,000
2011 Cost of Goods Sold (based on error numbers): $68,000

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Definitions:

On Demand

A service or product made available whenever requested by a customer, often implying immediate or quick delivery.

Acceleration Clause

A provision in a loan contract that allows the lender to demand immediate repayment of the entire loan amount if certain conditions are breached.

Promissory Note

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.

Negotiable

Able to be transferred or endorsed to another party in exchange for money or as part of a contractual agreement.