Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $334,120 instead of the correct amount of $320,760. Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop. Balance Sheet Items Overstated/Understated Amount Merchandise Inventory $ Current Assets Total Assets Owner's Equity b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8. Income Statement Items Overstated/Understated Amount Cost of Merchandise Sold $ Gross Profit Net Income c. If uncorrected, what would be the effect of the error on the 20Y9 income statement? Income Statement Items Understated/Overstated Amount Cost of Merchandise Sold $ Gross Profit Net Income d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet? The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Effect of Errors in Physical Inventory

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $334,120 instead of the correct amount of $320,760.

Enter all amounts as positive numbers.

a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items	Overstated/Understated	Amount
Merchandise Inventory		$
Current Assets
Total Assets
Owner's Equity

b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

Income Statement Items	Understated/Overstated	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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