Question 1

Make Money Company Inc. had beginning inventory of $25,200, purchases of $87,600, ending inventory of $29,100, sales of $153,000, and operating expenses of $30,000 for 2012. An accounting clerk input the ending inventory as $21,900. What is the effect on 2013 gross profit??

Accepted Answer

The ending inventory for 2012 is understated by $7,200 ($29,100 - $21,900), which means the cost of goods sold for 2012 is overstated by $7,200. This error will carry over to 2013, causing the beginning inventory for 2013 to be understated by $7,200, thus overstating the 2013 gross profit by $7,200.

Question 2

Beginning inventory for the year ended December 31, 2011, is understated. How will this error affect net income for 2011 and 2012?

Accepted Answer

Since beginning inventory for 2011 was understated, the cost of goods sold for 2011 was overstated, which in turn understates net income for 2011. However, in 2012, when the beginning inventory is corrected, cost of goods sold will be lower, which will overstate net income for 2012.

Question 3

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

Accepted Answer

Under the periodic inventory system, the inventory cost and cost of goods sold are calculated based on the physical count of inventory at the end of the accounting period.

Question 4

If ending inventory is understated for Year 1, then in Year 2:

Accepted Answer

If ending inventory is understated in Year 1, it means that the cost of goods sold (COGS) is overstated in Year 1. This leads to an understatement of the beginning inventory for Year 2. As a result, COGS for Year 2 will be understated (because the beginning inventory is part of the COGS calculation), and gross profit will be overstated (since gross profit is calculated as sales minus COGS).

Question 5

Make Money Company Inc. had beginning inventory of $25,200, purchases of $87,600, ending inventory of $29,100, sales of $153,000, operating expenses of $30,000, and a tax rate of 40% for 2012. An accounting clerk input the ending inventory as $21,900. What is the effect on 2012 gross profit?

Accepted Answer

The correct ending inventory amount should be $29,100 instead of $21,900. This means that the ending inventory was understated by $7,200 ($29,100 - $21,900).

Since gross profit is calculated as sales minus cost of goods sold (beginning inventory + purchases - ending inventory), the cost of goods sold will be overstated by $7,200 ($87,600 - $25,200 - $29,100 + $21,900).

Therefore, gross profit will be $7,200 lower ($153,000 - $87,600 + $25,200 + $29,100 - $21,900 - $30,000) due to the input error.

Question 6

Beginning inventory and ending inventory have opposite effects on cost of goods sold.

Accepted Answer

Beginning inventory is subtracted from purchases to calculate cost of goods available for sale, while ending inventory is subtracted from cost of goods available for sale to calculate cost of goods sold. Therefore, an increase in beginning inventory would decrease cost of goods available for sale and increase cost of goods sold, while an increase in ending inventory would increase cost of goods available for sale and decrease cost of goods sold.

Question 7

If ending inventory for the period is overstated, then gross profit for that year will be overstated.

Accepted Answer

When ending inventory for the period is overstated, it means that the value of inventory on hand is recorded at a higher value than its actual cost. This results in a higher cost of goods sold and a lower gross profit. However, if ending inventory is overstated, it would decrease the cost of goods sold and increase gross profit, leading to an overstatement of gross profit.

Question 8

Football, Inc.'s clerk made a mistake while preparing the financial statements. The ending inventory for Year 1 should have been $20,000, but the clerk recorded it as $23,000 on the income statement. Assume that sales for Years 1 and 2 are $90,000 per year and purchases are $20,000 per year. Beginning inventory for Year 1 of $12,000 and ending inventory for Year 2 of $21,000 were correctly recorded. Complete the following income statement for Year 1 and 2.

Accepted Answer

The answer of Football, Inc.'s clerk made a mistake while...

Question 9

There is an error in computing ending inventory in Year 1. Therefore:

Accepted Answer

An error in ending inventory in Year 1 will affect the cost of goods sold and gross profit for Year 1, but it will have an opposite effect on Year 2's beginning inventory, thus correcting the total gross profit over the two years.

Question 10

Ending inventory for the year ended December 31, 2011, is understated by $8,000. How will this error affect net income for 2012?

Accepted Answer

An understatement of ending inventory in 2011 means that the cost of goods sold was overstated, reducing net income for 2011. In 2012, the beginning inventory will be understated, leading to an understatement of the cost of goods sold and thus an overstatement of net income by $8,000.

Question 11

Crazy Eddie "cooked the books" which ultimately led the company to go out of business. Which of the following is a correct statement about the frauds at Crazy Eddie?

Accepted Answer

Crazy Eddie systematically overstated their inventory counts, which eventually became larger than the total profits the company reported since going public. This was a key factor in the company's eventual downfall.

Question 12

In the periodic inventory system, the inventory account is debited for the purchases made during the year.

Accepted Answer

In the periodic inventory system, the inventory account is not debited for each purchase throughout the year. Instead, purchases are recorded in a purchases account and the cost of goods sold is only calculated at the end of the accounting period through a physical count of inventory. The inventory account is adjusted based on that final calculation.

Question 13

Happy House Corporation reported net sales of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $25,000. If the tax rate is 40%, after the error has been corrected, net income will:

Accepted Answer

The error discovered is an understatement of ending inventory, which means cost of goods sold (COGS) was overstated by $25,000. As a result, when the error is corrected, COGS will decrease by $25,000 and net income will increase. The tax rate of 40% means that the increase in net income will be offset by a higher tax expense of $10,000 (40% of $25,000). Therefore, the net effect on net income will be an increase of $15,000 ($25,000 - $10,000).

Question 14

An error in the ending inventory for the year ended December 31, 2011:

Accepted Answer

An error in the ending inventory for 2011 affects the cost of goods sold and net income for 2011 and will also affect the beginning inventory and cost of goods sold for 2012, thus impacting both years' financial statements.

Question 15

If the cost of goods sold is understated for the year, then:

Accepted Answer

If the cost of goods sold is understated, it means that less expense is recognized, leading to an overstatement of ending inventory.

Question 16

Happy House Corporation reported net income of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been overstated by $25,000. The correct net income was:

Accepted Answer

The ending inventory was overstated, which means that the cost of goods sold was understated by the same amount ($25,000). This means that the correct net income would be $400,000 ($425,000 - $25,000). Therefore, the correct answer is choice C.

Question 17

Debit Company's $2 million cost of inventory at the end of last year was overstated by $250,000.
1. What was the effect of this error on last year's reported total assets, gross profit, and net income?
2. What is the effect of this error on this year's reported total assets, gross profit, and net income?
3. What is the effect of this error on next year's reported total assets, gross profit, and net income?

Accepted Answer

The answer of Debit Company's $2 million cost of inventory...

Question 18

Ending inventory for the year ended December 31, 2011, is understated by $8,000. How will this affect net income for 2011?

Accepted Answer

Ending inventory is a balance sheet item that affects cost of goods sold, which is an income statement item. If ending inventory is understated, cost of goods sold will be overstated, and as a result, net income will be understated. Therefore, net income will be understated by $8,000.

Question 19

If ending inventory for the year ended December 31, 2011, is understated, this error will cause owners' equity to be:

Accepted Answer

An understated ending inventory for 2011 will result in an overstated cost of goods sold for 2011, which will reduce net income for 2011. This will cause owners' equity to be understated at the end of 2011. In 2012, the understated ending inventory from 2011 will result in an understated cost of goods sold for 2012, which will increase net income for 2012. This will cause owners' equity to be overstated at the end of 2012.

Question 20

If ending inventory is overstated by $6,000, then:

Accepted Answer

When ending inventory is overstated, it reduces the cost of goods sold, which increases gross profit and net income, thus overstating stockholders' equity.

Quiz 6: Inventory Cost of Goods Sold