Chapter 5, Problem 13E

Impacts of inventory error on key accounts P3

A retailer completed a physical count of ending merchandise inventory. When counting inventory, employees did not include $3,000 of incoming goods shipped by a supplier on December 31 under FOB shipping point. These goods had been recorded in Merchandise Inventory, but they were not included in the physical count because they were in transit. This means shrinkage was incorrectly overstated by $3,000.

Compute the amount of overstatement or understatement for each of the following amounts for this period.

a. Ending inventory

b. Total assets

c. Net income

d. Total equity

Exercise 5-13

Physical count error and profits A2

Refer 10 the information in Exercise 5-12 and indicate whether the failure to include in-transit inventory as part of the physical count results in an overstatement, understatement, or no effect on the following ratios,

a. Gross margin ratio

b. Profit margin ratio

c. Acid-test ratio

d. Current ratio