It is quite easy to overlook goods on hand count

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: s possible. A general rule is that overstatements of ending inventory cause overstatements of income, while understatements of ending inventory cause understatements of income. For instance, compare the following correct and incorrect scenario -- where the only difference is an overstatement of ending inventory by $1,000 (note that purchases were correctly recorded -- if they had not, the general rule of thumb would not hold): Correct Incorrect $ 5,000 $ 5,000 11,000 11,000 $16,000 $16,000 4,000 5,000 Cost of goods sold $12,000 $11,000 Sales $25,000 $25,000 12,000 11,000 $13,000 $14,000 Beginning inventory Purchases **** Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Had the above inventory error been an understatement ($3,000 instead of the correct $4,000), then the ripple effect would have caused an understatement of income by $1,000. Inventory errors tend to be counterbalancing. That is, one year’s ending inventory error becomes the next year’s beginning inventory error. The general rule of thumb is that overstatements of beginning inventory cause that year’s income to be understated, while understatements of beginning inventory cause overstatements of income. Examine the following table where the only error relates to beginning inventory balances: Download free ebooks at 44 Inventory Errors Current Assets: Part II Correct Incorrect $ 4,000 $ 5,000 11,000 11,000 $15,000 $16,000 3,000 3,000 Cost of goods sold $12,000 $13,000 Sales $25,000 $25,000 12,000 13,000 $13,000 $12,000 Beginning inventory Purchases Cost of goods available for sale Ending inventory **** Cost of goods sold Gross profit Please click the advert Hence, if the above data related to two consecutive years, the total income would be correct ($13,000 + $13,000 = $14,000 + $12,000). However, the amount for each year is critically flawed. The financial industry needs a strong software platform That’s why we need you SimCorp is a leading provider of software solutions for the financial industry. We work together to reach a common goal: to help our clients succeed by providing a strong, scalable IT platform that enables growth, while mitigating risk and reducing cost. At SimCorp, we value commitment and enable you to make the most of your ambitions and potential. Are you among the best qualified in finance, economics, IT or mathematics? Find your next challenge at MITIGATE RISK 45 REDUCE COST ENABLE GROWTH...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online