Burgess Company makes the following errors during 2025. 1. 2. 3. Ending inventory is understated, but purchases are recorded correctly. Ending inventory is correct, but a purchase on account for 2025 was recorded in 2026. Both ending inventory and purchases on account are understated for 2025. (Assume the purchase was recorded in 2023.) Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for 2025 and 2026. 1 Working capital Current Year Understated Y Subsequent Year No effect V
Burgess Company makes the following errors during 2025. 1. 2. 3. Ending inventory is understated, but purchases are recorded correctly. Ending inventory is correct, but a purchase on account for 2025 was recorded in 2026. Both ending inventory and purchases on account are understated for 2025. (Assume the purchase was recorded in 2023.) Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for 2025 and 2026. 1 Working capital Current Year Understated Y Subsequent Year No effect V
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Intermediate Accounting 105
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Transcribed Image Text:**Burgess Company Financial Error Analysis for 2025**
Burgess Company encountered the following accounting errors during the year 2025:
1. **Ending Inventory Understatement**: The ending inventory was recorded lower than its actual value, though purchases were accurately recorded.
2. **Purchase Recording Error**: While ending inventory is correct, a 2025 purchase on account was mistakenly recorded in 2026.
3. **Understatement of Both Inventory and Purchases**: Both ending inventory and purchases on account were understated for 2025. It is assumed that the purchase was recorded in 2023.
**Impact Analysis of the Errors on Financial Metrics**
For each error, the impacts on various financial metrics across the current and subsequent year are detailed below:
1. **First Error**:
- **Working Capital**: Understated in the current year; no effect in the subsequent year.
- **Current Ratio**: Understated in the current year; no effect in the subsequent year.
- **Retained Earnings**: Understated in the current year; overstated in the subsequent year.
- **Net Income**: Understated in the current year; overstated in the subsequent year.
2. **Second Error**:
- **Working Capital**: Understated for both current and subsequent years.
- **Current Ratio**: Overstated in the current year; understated in the subsequent year.
- **Retained Earnings**: No effect in both years.
- **Net Income**: No effect in both years.
3. **Third Error**:
- **Working Capital**: Overstated in the current year; no effect in the subsequent year.
- **Current Ratio**: No effect in both years.
- **Retained Earnings**: No effect in the current year; overstated in the subsequent year.
- **Net Income**: Overstated in the current year; understated in the subsequent year.
This analysis helps in understanding how these specific errors will affect the financial health indicators and reporting for the years 2025 and 2026.
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