During 2013, P Company Discovered That the Ending Inventories Reported

question 74

Multiple Choice

During 2013, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2011 $120,000 understated
2012 150,000 overstated
P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2013, would be:

• A)Correct.
• B)$30,000 overstated.
• C)$150,000 overstated.
• D)$270,000 overstateD.The $120,000 understated ending inventory would cause the 2011 COGS to be overstated, understating NI and RE.That same error would cause 2012 beginning inventory to be understated, overstating NI and RE by the same amount, effectively correcting the RE balance.The $150,000 overstated ending inventory would cause the 2012 COGS to be understated, overstating NI and RE.

---

Definitions:

Consignment Activity

Refers to the process where goods are placed in the care of another, but the ownership remains with the supplier until the goods are sold.

Trespass to Chattels

A tort in which one person unlawfully interferes with another person's lawful right of possession of personal property.

Conversion

In legal terms, conversion refers to the unauthorized act of possessing or using someone else's property as if it were one's own.

Sale on Approval

A transaction in which goods are delivered to a buyer for examination before the sale is finalized, allowing for return if not satisfied.