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Indicate in each of the spaces provided the effect of the described errors on the various...

Question:

Indicate in each of the spaces provided the effect of the described errors on the various elements of a company's financial statement Use the following codes: 0 = amount is overstated; U = amount is understated; NE = no effect. Assume a periodic inventory system and all sales and purchases are on credit.

Accounts Receivable Inventory Accounts Payable Sales Cost of Goods Sold
Example: Excluded goods in the rented warehouse from inventory count. NE U NE NE O
A.) Goods in transit shipped "f.o.b.destination" by supplier were recorded as a purchase but were excluded from ending inventory.
B.) Goods held on consignment were included in inventory count and recorded as a purchase.
C.) Goods in transit shipped "f.o.b. shipping point" was not recorded as a sale and were included in ending inventory.
D.) Goods were shipped and appropriately excluded from ending inventory but the sale was not recorded.

Inclusions & Exclusions From Ending Inventory:

When the periodic inventory system is used, it is not suufience to simply count the ending inventory and adjust the balance sheet account and the cost of goods sold expense. The items included in inventory should be scrutinized to ensure they are valid and goods in transit should be considered as well.

Answer and Explanation:


Accounts Receivable Inventory Accounts Payable Sales Cost of Goods Sold Explanation
Example: Excluded goods in the rented warehouse from inventory count. NE U NE NE O
A.) Goods in transit shipped "f.o.b.destination" by supplier were recorded as a purchase but were excluded from ending inventory. NE NE O NE O "f.o.b.destination" means that ownership is transferred when the goods arrive. The purchases should not have been recorded before that
B.) Goods held on consignment were included in inventory count and recorded as a purchase. NE O O NE NE* Consignment inventory is not the property of the entity and neither the inventory not the AP should be included
C.) Goods in transit shipped "f.o.b. shipping point" was not recorded as a sale and were included in ending inventory. U O NE U U Ownership has passed to the buyer and the sales transaction should be recorded and the goods excluded from ending inventory
D.) Goods were shipped and appropriately excluded from ending inventory but the sale was not recorded. U NE NE U NE The sales transaction should haven been recorded
* The ending inventory adjustment would cancel the purchase

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Items that Make Up Merchandise Inventory

from Accounting 101: Financial Accounting

Chapter 6 / Lesson 2
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