Financial Statement Effects of Inventory Errors

An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because

ending inventory of one period is the beginning inventory of the next period.

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year?

$2,000 overstatement of cost of goods sold. $2,000 understatement of net income.

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2?

Cost of goods sold is understated. Beginning inventory is understated.

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2? Multiple select question.

Cost of goods sold is understated. Beginning inventory is understated.

If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income?

Cost of goods sold will be overstated and net income will be understated.

Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect of the error on the financial statements.

Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000.

Guns R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement.

Cost of goods sold will be too low by $5,000.

In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply.

Gross profit in the current year, year 1, will be overstated. Cost of goods sold in the following year, year 2, will be overstated. Cost of goods sold in the current year, year 1, will be understated. Gross profit in the next year, year 2, will be understated. this is not an effect Net income in the next year, year 2, will not be affected by the error.

XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error

Net income Current assets Cost of goods sold not; revenues long term assets

True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well.

True if your assets are reported higher than they are, then your equity will also be reported as higher than it is

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the current year's income statement.

The current year's cost of goods sold will be too high. The current year's net income will be too low.

Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement.

This year's cost of goods sold will be too low. This year's net income will be too high.

Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet.

This year's total assets will be understated. This year's total equity will be understated.

The ending inventory of the previous period is the

beginning inventory of the current period

understated ending inventory year one is equal to

understated beginning inventory year 2