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:

Building

A fixed structure used for residential, commercial, or industrial purposes, considered a long-term physical asset in accounting.

Discount

A reduction applied to the normal selling price of goods or services, usually offered as an incentive to encourage purchase.

Common Stock

Equity ownership in a corporation, with voting rights and eligibility to receive dividends.