Inventory Errors
an Audit of the Inventory Records of Missouri

question 163

Essay

Inventory errors
An audit of the inventory records of Missouri Inc. identified a number of errors. These errors are summarized in Exhibit A below:
$$\begin{array}{l}\text { EXHIBIT A }\\\begin{array} { | c | r | l | r | } \hline \text { Year } & \begin{array} { c } \text { Net Income } \\\text { Reported }\end{array} & { \text { Description of Error } } & \\\hline 2016 & \$ 120,000 & \text { Overstatement of ending inventory } & \mathbf { \$ 1 1 , 0 0 0 } \\2017 & \$ 95,000 & \text { Understatement of ending irventory } & \mathbf { 1 , 5 0 0 } \\\mathbf { 2 0 1 8 } & \mathbf { 5 9 9 , 0 0 0 } & \text { Understatement of ending inventory } & \mathbf { \$ 1 8 , 0 0 0 } \\\mathbf { 2 0 1 9 } & \mathbf { \$ 1 0 5 , 0 0 0 } & \text { Overstatement of ending inventory } & \mathbf { 5 2 0 , 0 0 0 } \\\mathbf { 2 0 2 0 } & \mathbf { \$ 1 2 0 , 0 0 0 } & \text { Overstatement of ending inventory } & \mathbf { \$ 5 , 2 0 0 } \\\hline\end{array}\end{array}$$
Instructions
a)As financial accountant for Missouri, you have been asked to calculate the corrected net income amounts for each of the five years based on the audit findings.
b)Review your solution to part a) and consider the self-correcting effect of inventory errors. Why does total reported net income not equal total corrected income?

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Definitions:

Market Shares

The portion of a market controlled by a particular company or product, often expressed as a percentage of total sales in that market.

Legal Cartel Theory

A hypothesis that explores the conditions under which regulatory frameworks and laws allow for the existence and operation of cartels, which are otherwise illegal agreements among competitors to control prices or supply in a market.

Production Costs

Production costs refer to the total expenses incurred in the manufacture of a product, including labor, materials, and overhead costs.

Natural Monopolies

Markets or industries in which the characteristics of the goods or services make it more efficient for a single company to supply all the demand.