Impact of Accounting Errors on Financial Statement Items and Ratios

question 157

Essay

Impact of accounting errors on financial statement items and ratios
Cayman Corporation makes the following errors during the current year. Each error is an independent case.

Ending inventory is overstated by $1,120, but purchases are recorded correctly.

Both ending inventory and a purchase on account are understated in the same amount.


Ending inventory is correct, but a purchase on account was not recorded. (Assume the purchase of $880 was recorded in the following year).

Instructions
Indicate the effect of each error on working capital, the current ratio (assume the current ratio is greater than 1), retained earnings, and net income for the current year and the following year.

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Definitions:

Crown

A reference to the state or the monarchy in a legal context, often used in commonwealth countries.

Surface

The outermost or topmost layer of something, often referred to in contexts such as computing, geology, or skin.

Joint Tenants

Joint Tenants is a term used in real estate to describe a form of co-ownership where all owners hold an equal share of the property, and have a right of survivorship, meaning upon the death of one tenant, the property's ownership transfers to the surviving tenant(s).

Sever the Joint Tenancy

The legal process of converting a joint tenancy into a tenancy in common, thus allowing the owners to own a property in equal or unequal shares.