For Each of the Following Independent Scenarios, Indicate the Effect

question 131

Essay

For each of the following independent scenarios, indicate the effect of the error (if any)on:
i. 2012 net income;
ii. 2013 net income; and
iii. 2013 closing retained earnings.
The company uses the periodic system of inventory and its fiscal year-end is December 31. Ignore income tax effects. Consider each of the following independent scenarios:
a. Your analysis of inventory indicates that inventory at the end of 2012 was overstated by $27,000 due to an inventory count error. Inventory at the end of 2013 was correctly stated.
b. Invoices in the amount of $107,000 for inventory received in December 2012 were not entered in the books in 2012. They were recorded as purchases in January 2013 when they were paid. The goods were counted in the 2012 inventory count and included in ending inventory on the 2012 financial statements.
c. Goods received on consignment valued at $89,000 were included in the physical count of goods at the end of 2013 and included in ending inventory on the 2013 financial statements.

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Definitions:

Accrued Revenues

Income earned during an accounting period but not yet received or recorded at the statement date, representing future cash receipts.

Annual Depreciation

The amount of depreciation expense allocated for a fixed asset in one year, based on the asset's useful life and cost.

Prepaid Expense

An asset account that represents costs paid in advance for expenses that will be incurred within a future accounting period.

Accrued Expense

Expenses that have been incurred but not yet paid or recorded in the ledgers.