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Inventory Errors and Financial Statements

Inventory Errors and Financial Statements - financial...

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Inventory Errors and Financial Statements Income statement effects . An incorrect inventory balance causes an error in the calculation of cost  of goods sold and, therefore, an error in the calculation of gross profit and net income. Left  unchanged, the error has the opposite effect on cost of goods sold, gross profit, and net income in  the following accounting period because the first accounting period's ending inventory is the second  period's beginning inventory. The total cost of goods sold, gross profit, and net income for the two  periods will be correct, but the allocation of these amounts between periods will be incorrect. Since 
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Unformatted text preview: financial statement users depend upon accurate statements, care must be taken to ensure that the inventory balance at the end of each accounting period is correct. The chart below identifies the effect that an incorrect inventory balance has on the income statement. Impact of Error on Error in Inventory Cost of Goods Sold Gross Profit Net Income Ending Inventory Understated Overstated Understated Understated Overstated Understated Overstated Overstated Beginning Inventory Understated Understated Overstated Overstated Overstated Overstated Understated Understated...
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