Error Correction

Which of the following would result if the current year's ending inventory is understated in the cost of goods sold calculation? a. Cost of goods sold would be overstated b. Total assets would be overstated c. Net income would be overstated d. Retained earnings would be overstated

a. Cost of goods sold would be overstated

At the end of the current year, an entity failed to accrue sales commissions during the current year but paid in the next year. The error was not repeated in the next year. What was the effect of this error on current year-end ending working capital and retained earnings balance? Working capital Retained earnings a. Overstated Working Capital and Overstated Retained Earnings b. No effect Working Capital and Overstated Retained Earnings c. No effect Working Capital and Retained Earnings d. Overstated Working Capital and No effect Retained Earnings

a. Overstated Working Capital and Overstated Retained Earnings

Failure to record accrued salaries at the end of an accounting period results in a. Overstated retained earnings b. Overstated assets c. Overstated revenue d. Understated retained earnings

a. Overstated retained earnings

At the middle of the year, an entity paid for insurance premium for the current year and debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record the amount expired. In the financial statements prepared at year-end, the omission a. Overstates owners' equity b. Understates assets c. Understates net income d. Overstates liabilities

a. Overstates owners' equity

An entity uses a periodic inventory system and neglected to record a purchase of merchandise on account at year-end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and shareholders' equity at year-end and net earnings for the year? a. Understate asset , Understate Liabilities, No Effect on Equity, and No Effects on Net Earnings b. Understate asset , No Effects on Liabilities, Understate Equity, and Understate Net Earnings c. No Effect on asset , Understate Liabilities, Overstate Equity, and Overstate Net Earnings d. No Effect on asset , Overstate Liabilities, Understate Equity, and Understate Net Earnings

a. Understate asset , Understate Liabilities, No Effect on Equity, and No Effects on Net Earnings

An entity uses a periodic inventory system. If the entity's beginning inventory in the current year is overstated, and that is the only error in the current year, then the entity's income for the current year would be a. Understated and assets correctly stated. b. Understated and assets overstated. c. Overstated and assets overstated. d. Understated and assets understated.

a. Understated and assets correctly stated.

On December 27, 2012, an entity ordered merchandise for resale. The merchandise was shipped f.o.b. shipping point on December 28, 2012, and the goods arrived on January 2, 2013. The invoice was received on December 30, 2012. The entity did not record the purchase in the current year and did not include the goods in ending inventory. The effects on the financial statements for the current year were a. Income and owners' equity were correct; liabilities were incorrect, assets were correct. b. Income and owners' equity were correct; assets and liabilities were incorrect. c. Income, assets, liabilities and owners' equity were correct. d. Income, assets, liabilities and owners' equity were incorrect.

b. Income and owners' equity were correct; assets and liabilities were incorrect.

An overstatement of ending inventory in the current period would result in income of the next period being a. Overstated b. Understated c. Correctly stated d. The answer cannot be determined from the information

b. Understated

For an entity with a periodic inventory system, which of the following would cause income to be overstated in the period of occurrence? a. Overestimating bad debt expense b. Understating beginning inventory c. Overstated purchases d. Understated ending inventory

b. Understating beginning inventory

Which of the following, if discovered in the accounting period subsequent to the period of occurrence, requires an entity to report the correction of an error? a. The estimate of useful life of a depreciable asset should have been revised. b. A change from double declining to straight line depreciation. c. Capitalization of an expense. d. Change in percentage of sales used for determining bad debt expense.

c. Capitalization of an expense.

Which of the following errors will not self-correct in the next year? a. Accrued expense not recognized at year-end b. Accrued revenue not recognized at year-end c. Depreciation expense overstated for the year d. Prepaid expense not recognized at year-end

c. Depreciation expense overstated for the year

Which of the following is a counterbalancing error? a. Understated depletion expense b. Bond premium under-amortized c. Prepaid expense adjusted incorrectly d. Overstated depreciation expense

c. Depreciation expense overstated for the year

If at end of period an entity erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause a. The ending inventory, cost of goods available for sale and retained earnings to be understated b. The ending inventory, cost of goods sold and retained earnings to be understated c. No effect on net income, working capital and retained earnings d. Cost of goods available for sale, cost of goods sold and net income to be understated

c. No effect on net income, working capital and retained earnings

The current year-end physical inventory appropriately included merchandise purchased on account that was not recorded in purchases until next year. What effect will this error have on the current year-end, assets, liabilities, retained earnings, and earnings for the year then ended, respectively? a. Understate, no effect, overstate, overstate b. No effect, overstate, understate, understate c. No effect, understate, overstate, overstate d. No effect, understate, understate, overstate

c. No effect, understate, overstate, overstate

If an inventory account is overstated at the beginning of the year, the effect is to a. Overstate net purchases b. Overstate gross margin c. Overstate cost of goods available for sale d. Understate cost of goods sold

c. Overstate cost of goods available for sale

When the current year's ending inventory is overstated a. The current year's cost of goods sold is overstated. b. The current year's total assets are understated. c. The current year's net income is overstated. d. The next year's net income is overstated.

c. The current year's net income is overstated.

At the end of the current year, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the current year-end statement of financial position? a. No effect on Accrued Liabilities and Retained Earnings b. No effect on Accrued Liabilities and Overstated Retained Earnings c. Understated Accrued Liabilities and No effect on Retained Earnings d. Understated Accrued Liabilities and Overstated Retained Earnings

c. Understated Accrued Liabilities and No effect on Retained Earnings

Which of the following should not be reported retroactively? a. Use of an unacceptable accounting principle, then changing to an acceptable accounting principle. b. Correction of an overstatement of ending inventory made two years ago. c. Use of an unrealistic accounting estimate, then changing to a realistic estimate. d. Change from a good faith but erroneous estimate to a new estimate.

d. Change from a good faith but erroneous estimate to a new estimate.

Which of the following errors could result in an overstatement of both current assets and shareholders' equity? a. An understatement of accrued sales commissions b. Noncurrent note receivable principal is misclassified as current asset c. Annual depreciation on manufacturing machinery is understated d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead

d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead

If an inventory account is understated at year-end, the effect is to a. Overstate the net purchases b. Overstate the gross margin c. Overstate the cost of goods available for sale d. Overstate the cost of goods sold

d. Overstate the cost of goods sold

Failure to record depreciation expense at the end of an accounting period results in a. Understated income b. Understated assets c. Overstated expenses d. Overstated assets

d. Overstated assets

Which of the following is not an example of an accounting error? a. Misstatement of asset, liability or equity b. Incorrect classification of an expenditure as between expense and asset c. Failure to recognize accrual and deferral d. Recognition of gain on fully depreciated asset

d. Recognition of gain on fully depreciated asset

The overstatement of ending inventory in the current year will cause a. Retained earnings to be understated in the current year-end statement of financial position b. Cost of goods sold to be understated in the income statement of next year. c. Cost of goods sold to be overstated in the income statement of the current year. d. Statement of financial position not to be misstated in the next year-end.

d. Statement of financial position not to be misstated in the next year-end.

Failure to record the expired amount of prepaid rent expense would not a. Understate expense b. Overstate net income c. Overstate owners' equity d. Understate liabilities

d. Understate liabilities

Which of the following would cause income of the current period to be understated? a. Capitalizing research and development cost b. Failure to recognize unearned rent revenue c. Changing from weighted average to FIFO for merchandise inventory d. Understating estimate of residual value

d. Understating estimate of residual value