**Educational Content: Understanding Inventory Errors and Their Impact on Financial Statements**---You own a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as **$820,000** instead of the correct amount of **$280,000**. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation.**(a) Balance Sheet Impact** What effect did the error have on the items of the balance sheet for the retailer? Express your answer as **overstated** or **understated** for the items affected by the error. - Merchandise inventory was [Select: overstated/understated] by $ _______. Therefore, Current assets, Total assets, and Total stockholders' equity were [Select: overstated/understated] by $ _______.**(b) Income Statement Impact** What effect will the error have on the items of the income statement for the retailer? - The cost of goods sold was [Select: overstated/understated] by $ _______. Therefore, gross profit and net income were [Select: overstated/understated] by $ _______.**(c) Perception of Results** Did this error make the retailer’s quarterly results look better or worse than they actually were? - The inventory error made the company's quarterly results look [Select: better/worse] than they actually were.--- **Analysis of Financial Impact:**1. **Error Details:** - **Reported Inventory:** $820,000 - **Actual Inventory:** $280,000 - **Overstatement Amount:** $540,0002. **Balance Sheet Corrections:** - **Effect on Assets and Equity:** The misreporting led to a significant overstatement of both assets and stockholders’ equity, demanding adjustments to align the reports accurately.3. **Income Statement Adjustments:** - An incorrect cost of goods sold can alter the perceived profits or losses, influencing stakeholders’ decisions and company’s market value.4. **Overall Financial Reporting:** - Ensuring accuracy in inventory reporting is vital for maintaining trust and financial integrity. This error underscores the necessity for meticulous financial review before reports are disseminated.This educational illustration highlights the critical nature of careful financial reporting and the widespread implications of inventory errors.

Incorrect valuation of inventory have impact on various aspects like closing inventory, current assets, total assets and profit as well. Therefore, it is very necessary to correctly value and record the closing inventory.a) Since the inventory should have been valued at $280,000 but it is reported at $820,000. There has been over statement of $820,000 - $280,000 = $540,000 As a result current assets, total assets and total stockholder's equity will also be overstated by $540,000 b) Cost of goods sold = Opening inventory + Purchases - Closing inventory Since the closing inventory is overstated, as a result, cost of goods sold will be reduced as more amount will be subtracted. Therefore, cost of goods sold will be under stated by $540,000. Gross profit = Sales - cost of goods sold Since the cost of goods sold is under stated, gross profit will be overstated and hence would be the net profit as well by $540,000 c) Since the assets were overstated and net income also increased than it was, it made the results look better than they actually were.

Business

Accounting

You own a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as $820,000 instead of the correct amount of $280,000. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation. (o) What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error. . Therefore, Current assets, Total assets, and Total Merchandise inventory was Select- stockholders' equity were Selech-- by $ | by $ (b) What effect will the error have on the items of the income statement for the retailer? |by $1 The cost of goods sold was Select- . Therefore, gross profit and net income were -Select- | by $ () Did this error make the retailer's quarterly results look better or worse than they actually were? The inventory error made the company's quarterly results look Select- than they actually were.

You own a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as $820,000 instead of the correct amount of $280,000. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation. (o) What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error. . Therefore, Current assets, Total assets, and Total Merchandise inventory was Select- stockholders' equity were Selech-- by $ | by $ (b) What effect will the error have on the items of the income statement for the retailer? |by $1 The cost of goods sold was Select- . Therefore, gross profit and net income were -Select- | by $ () Did this error make the retailer's quarterly results look better or worse than they actually were? The inventory error made the company's quarterly results look Select- than they actually were.

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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