Four Different Independent Errors Relating to Inventory Are Described Below

question 169

Essay

Four different independent errors relating to inventory are described below.You are to indicate the dollar amount by which various financial statement components are misstated and whether the error causes each component to be too high or too low.For example,if the effect of the error is to cause the component to be too high by $300,you should enter + 300 in the appropriate column; if it makes the component too low by $750,enter $-750.If a component is unaffected,enter a 0.Similarly,if on financial statements of a later year the error would have counterbalanced on that later year's statements,enter a 0.A periodic inventory system is used unless specifically stated to the contrary.
(a) The 2001 ending inventory is understated by $400 and the related purchase on credit for that amount was not recorded until 2013.
(b) At the end of 2001,the company failed to recognize that $1,500 of inventory was in the hands of a consignee.At the end of 2013,a similar error was made and the cost of goods consigned out was $1,100.
(c) In running a total of inventory count sheets,a clerk included one line for $350 twice at the end of 2001; therefore,the inventory was overstated $350.
(d) On December 31,2001,a customer agreed to buy goods for $2,500 and asked that delivery be delayed until January 3,2013.The goods,on which the average mark-up was 40 percent of sale price,were still on hand on December 31.They were included in the 2001 inventory.The customer was properly billed for the goods,and the sale was recorded on December 31,2001. $$\begin{array} { | l | l | l | l | l | } \hline & { \text { 2001 Statements } } && { \text { 2002 Statements } } \\&&& \text { Owners' } & \text { Cost of } \\\hline \text { Error } & \text { Assets } & \text { Liabilities } &\text { Equity }& \text { Goods Sold }\\\hline \text { (a) } & & & \\\hline \text { (b) } & & & \\\hline \text { (c) } & & & \\\hline \text { (d) } & & & \\\hline\end{array}$$

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Definitions:

Beta Value

A measure of a stock's volatility in relation to the overall market, indicating the level of risk associated with the stock.

Unsystematic Risk

The risk associated with a specific company or industry, also known as non-systemic risk, which can be mitigated through diversification.

Risk Premium

The extra return expected by investors for taking on a higher level of risk compared to a risk-free investment.

Market Return

The total return from investing in a market or an index, including dividends, interest, and capital gains.