Question 1

An understatement of the ending inventory will cause cost of goods sold to be understated and net income to be overstated for that period.

Accepted Answer

An understatement of the ending inventory will cause the cost of goods sold to be overstated and net income to be understated for that period.

Question 2

Counterbalancing errors are those that are not offset in the next accounting period.

Accepted Answer

Counterbalancing errors are those that are offset in the next accounting period, correcting themselves over two periods.

Question 3

Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be

A) net income, current assets, and retained earnings were overstated.
B) net income was correct and current assets were understated.
C) net income and current assets were overstated and current liabilities were understated.
D) net income, current assets, and retained earnings were understated.

net income, current assets, and retained earnings were overstated.

Accepted Answer

Including consigned goods in inventory that Eller Co. does not own results in an overstatement of inventory, which is a current asset. This overstatement leads to an incorrect increase in the cost of goods sold when the goods are eventually sold, which in turn would overstate net income for the period if the error is not corrected. Since net income contributes to retained earnings, retained earnings would also be overstated.

Question 4

Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be

A) net income, current assets, and retained earnings were understated.
B) net income was correct and current assets were understated.
C) net income was understated and current liabilities were overstated.
D) net income was overstated and current assets were understated.

Accepted Answer

By not including the purchased merchandise in its inventory, Cross Co. would have understated its current assets because the inventory is not reflected on the balance sheet. This also leads to an understatement of net income and retained earnings, as the cost of goods sold would be too low, artificially inflating profits.

Question 5

On June 15, 2008, Tolon Corporation accepted delivery of merchandise which it pur-chased on account. As of June 30, Tolon had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2008 would be

A) assets and stockholders' equity were overstated but liabilities were not affected.
B) stockholders' equity was the only item affected by the omission.
C) assets, liabilities, and stockholders' equity were understated.
D) none of these.

Accepted Answer

The answer of On June 15, 2008, Tolon Corporation accepted...

Question 6

The ending inventory of Bonie Company is understated in year one by $20,000. This error is not corrected in year one or in year two. What impact will this error have on total net income for years one and two combined?

A) No effect on total net income for the two years
B) Overstate total net income by $20,000
C) Understate total net income by $20,000
D) Overstate net income for year one by $20,000 and year two by $20,000 for a total overstatement of $40,000

Accepted Answer

The understatement of ending inventory in year one will understate net income in year one but will overstate net income in year two by the same amount, thus having no effect on the total net income for the two years combined.

Deck 25: Appendix I: Error Analysis