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Chapter 13, Problem 1TF

An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1.

Expert Solution & Answer
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To determine

Identify whether the given statement is true or false.

Answer to Problem 1TF

An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1 is true.

Explanation of Solution

Inventory error: It is the error to identify a mistake in physical count or in pricing qualities. It is also discovered in same accounting period.

The following table shows the effect of inventory errors:

Serial NoDetailsCost of goods soldNet incomeRetained earnings

1.

Overstatement of ending inventoryUnderstatedOverstatedOverstated
2.Overstatement of purchasesOverstatedUnderstatedUnderstated
3.Understatement of beginning inventoryUnderstatedOverstatedOverstated
4.Freight-in charges are understatedUnderstatedOverstatedOverstated
5.Understatement of ending inventoryOverstatedUnderstatedUnderstated
6.Understatement of purchasesUnderstatedOverstatedOverstated
7.Overstatement of beginning inventoryOverstatedUnderstatedUnderstated
8.Understatement of purchases plus understatement of ending inventory by the same amountNo effectNo effectNo effect

Table (1)

Thus, the above table indicates that if ending inventory is overstated in the same year (20-1) then it will cause the net income to be overstated in the same year (20-1).

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Chapter 13 Solutions

Bundle: College Accounting, Chapters 1-9, Loose-Leaf Version, 22nd + LMS Integrated for CengageNOWv2, 2 terms Printed Access Card for Heintz/Parry's College Accounting, Chapters 1-27, 22nd

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