Loss On Inventory Chapter 4

Determine the effect on a company’s Assets and Net Income from the following transaction: a loss on inventory is recorded as an adjusting entry.

Assets Net Income
A Decreased Decreased
B Decreased No effect
C Increased No effect
D Increased Increased
E None of the above

The Effect of Inventory Errors Chapter 4

A company discovered in Year 3 that the following inventory errors had occurred:

  • Ending Inventory for Year 1 was understated by $5,000.
  • Ending Inventory for Year 2 was overstated by $7,000.

Determine the effect those errors would have on the Year 1 and Year 2 financial statements:

  1. How do the errors above affect Assets reported on the Year 1 financial statements? Assets would be...
    • a. Overstated by $2,000
    • b. Overstated by $5,000
    • c. Overstated by $7,000
    • d. Understated by $5,000
    • e. Understated by $12,000
  2. How do the errors above affect Net Income reported on the Year 1 financial statements? Net income would be...
    • a. Overstated by $2,000
    • b. Overstated by $5,000
    • c. Overstated by $7,000
    • d. Understated by $5,000
    • e. Understated by $12,000
  3. How do the errors above affect Assets reported on the Year 2 financial statements? Assets would be...
    • a. No effect on assets
    • b. Overstated by $2,000
    • c. Overstated by $7,000
    • d. Understated by $2,000
    • e. Understated by $7,000
  4. How do the errors above affect Net Income and Shareholders’ Equity reported on the Year 2 financial statements? Net Income and Shareholders’ Equity would be...
    Net Income Shareholders’ Equity
    A Understated by $12,000 Understated by $7,000
    B Overstated by $5,000 No effect
    C Overstated by $7,000 Overstated by $2,000
    D Overstated by $7,000 Overstated by $7,000
    E Overstated by $12,000 Overstated by $7,000