11) If ending inventory in Period 1 is overstated, gross profit in Period 2 is __.
12) If ending inventory in Period 1 is understated, cost of goods sold in Period 2 is __.
13) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is
the only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated, or correctly stated for Years 1 and 2.
Item
Year 1
Year 2
Ending inventory
Beginning inventory
Cost of goods sold
14) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is the
only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated, or correctly stated for Years 1 and 2.
Item
Year 1
Year 2
Gross Profit
Net Income
Ending Retained Earnings
15) If Period 1 ending inventory is overstated, then what items are affected on the income statement? Indicate whether the item would be understated or overstated.
16) If Period 1 ending inventory is understated, then what items are affected on the income statement? Indicate whether the item would be understated or overstated
17) If gross profit is overstated in Period 1, then what is the effect on the ending inventory and net income in Period 1?
18) If cost of goods sold was understated in Period 1, then what is the effect of cost of goods sold and gross profit in Period 2?
The Correct Answer and Explanation is :
Here are the answers to your questions related to inventory errors and their effects on financial statements:
11) If ending inventory in Period 1 is overstated, gross profit in Period 2 is understated.
12) If ending inventory in Period 1 is understated, cost of goods sold in Period 2 is overstated.
13) If the ending merchandise inventory in Year 1 is overstated by $30,000:
| Item | Year 1 | Year 2 |
|---|---|---|
| Ending inventory | Overstated | Correctly stated |
| Beginning inventory | Correctly stated | Overstated |
| Cost of goods sold | Understated | Overstated |
14) If the ending merchandise inventory in Year 1 is overstated by $30,000:
| Item | Year 1 | Year 2 |
|---|---|---|
| Gross Profit | Overstated | Understated |
| Net Income | Overstated | Understated |
| Ending Retained Earnings | Overstated | Understated |
15) If Period 1 ending inventory is overstated, then the affected items on the income statement are:
- Cost of Goods Sold: Understated
- Gross Profit: Overstated
16) If Period 1 ending inventory is understated, then the affected items on the income statement are:
- Cost of Goods Sold: Overstated
- Gross Profit: Understated
17) If gross profit is overstated in Period 1, the effect on the ending inventory and net income in Period 1 will be:
- Ending Inventory: Overstated
- Net Income: Overstated
18) If cost of goods sold was understated in Period 1, the effect on cost of goods sold and gross profit in Period 2 will be:
- Cost of Goods Sold: Overstated
- Gross Profit: Understated