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Unformatted text preview: Chapter 8 –Inventory Errors Effects of Inventory Errors(assuming a periodic inventory and ignoring income taxes) I. A purchase on account is omitted from both Purchases and ending inventory and is not recorded in the succeeding year. A. Current Year 1. Income Statement: Income is correct because the errors in purchases and ending inventory offset each other. 2. Balance Sheet: Ending inventory and accounts payable are understated B. Succeeding Year: 1. Income Statement: Income is overstated because the beginning inventory is understated and therefore cost of goods sold is understated. 2. Balance Sheet: Accounts payable is understated and retained earnings is overstated. Note that if the purchase omitted from the current year was included in the succeeding year, the income would be correct in the second year because the errors would again offset each other. income would be correct in the second year because the errors would again offset each other....
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