2. Gabriela Company’s auditor discovered that the company inadvertently overstated ending Inventory for the prior year. If the error is not corrected, what effect will the error have on the following financial statement items for both the prior year and the current year? Indicate in each box a “+" (plus) if the item is overstated, a “-“ (minus) if the item is understated, and a "N/A" if there is no effect on the item. Prior Current Year Year Effect on Income Statement Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Balance Sheet Inventory on 12/31 Retained Earnings

2. Gabriela Company’s auditor discovered that the company inadvertently overstated ending Inventory for the prior year. If the error is not corrected, what effect will the error have on the following financial statement items for both the prior year and the current year? Indicate in each box a “+" (plus) if the item is overstated, a “-“ (minus) if the item is understated, and a "N/A" if there is no effect on the item. Prior Current Year Year Effect on Income Statement Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Balance Sheet Inventory on 12/31 Retained Earnings

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Kari Downs, an auditor with Wheeler CPAS, is performing a review of Waterway Company's inventory account. Waterway did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year- end was $747,000. However, the following information was not considered when determining that amount. (a1) Prepare a schedule to determine the correct inventory amount. (If an amount reduces the account balance then enter with a negative sign preceding the number, e.g. -15,000, or parenthesis e.g. (15,000). Enter O if there is no effect.) 1. 2. 3. 4. 5. 6. Ending inventory-as reported Included in the company's count were goods with a cost of $257,000 that the company is holding on consignment. The goods belong to Kroeger Corporation. The physical count did not include goods purchased by Waterway with a cost of $35,000 that were shipped FOB destination on December 28 and did not arrive at Waterway warehouse until January 3.…
The condensed statement of income of LUNA, Inc. for the year ended December 31, 2020 is presented below:LUNA, Inc.Statement of Income For the Year Ended December 31, 2020Sales P 1,000,000Cos of sales 600,000Gross income 400,000Operating expenses 150,000Net income P 250,000The December 31, 2020 audit of the company’s financial statements disclosed the following errors:a. December 31, 2020 inventory was understated by P31,000.b. Accrued expenses of P4,000 and prepaid expenses of P6,000 were not recognized in the company’s books.c. Sales of P5,000 were not recorded until January 2021, although the goods were shipped in December 2020 and were excluded from the December 31 physical inventory.d. Purchases of P30,000 made in December 2020, were not recorded although the goods were received and properly included in the December 31, physical inventory.e. A machine was sold for P10,000 on July 1, 2020 and the proceeds were credited to the Sales account. The machine was acquired on January 1,…
Effect of Inventory Errors During the taking of its physical inventory on December 31, 20Y3, Corbin Company incorrectly counted its inventory as $135,525 instead of the correct amount of $116,550. Indicate the effect of the misstatement on Corbin's December 31, 20Y3, balance sheet or income statement for the year ended December 31, 20Y3. For each, select if the amount is overstated or understated. Then, input the over or under amount, entered as a positive value. Cost of goods sold Balance sheet or income statement Overstated, Understated, Or no effect $ Current assets $ Gross profit $ Inventory $ Net income $ Stockholders' equity $ Total assets $
Because of increasing profits and inventory prices, the company changed from FIFO to LIFO inventory, which had a material effect on inventory and cost of sales. The change is adequately disclosed in the financial statements, and the auditor concurs with the change. The auditor will most likely issue a(an): Standard unmodified opinion O Unmodified opinion with explanatory paragraph O Unmodified opinion with changes to standard report wording Qualified oplon Disclaimer of opinion O Adverse opinion
- List and explain the substantive tests of Inventory and give example.
48 the auditor decided to render analytical procedure in testing the reasonableness of the inventory balances of the client as of December 31. The auditor used the retail method in projecting the expected inventory balance. Which of the following is incorrect? Group of answer choices Under the retail method, any abnormal shortages or overages shall be deducted from cost of goods available for sale both at retail and at cost in determining the cost percentages to be used. No further audit procedure is necessary if the difference between the projected inventory balance resulting the inventory estimation (retail method) and the balance reported per books is within the auditor’s tolerable error for the account balance. The auditor is allowed to heavily rely on analytical procedure under the assumption that the internal control over inventories are strong thus the assessment of control risk is at below the maximum level. If the observed difference between the estimated inventory as a…
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Explain why errors in the valuation of inventory at the endof the year are sometimes called “counterbalancing” or“self-correcting.”