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?

---

Definitions:

Residual Income

The amount of income that exceeds the minimum return expected from a particular investment or operation.

Residual Income

The income that remains after deducting the cost of capital from the operating income.

Performance Evaluation

The process of assessing and reviewing an employee's work performance and productivity, often leading to feedback or development plans.

Return On Investment

A measure used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments.