Question

I need the full brief for the answer my subject is Auditing

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Case 5: You are the auditor for KWC Corporation. You gathered comparative information for inventory and accounts payable and calculated the days purchases in accounts payable.

	2018	2019
Inventory	$34,270	$57,921
Accounts payable	$ 8,295	$10,628
Days purchases in accounts payable (365 days/payables turnover)	44.2 days	44.6 days

Required:

what is the effect of overestimate or underestimate of inventory on the financial statements?                                                                                           

Answer 1

Overstatement of Ending Inventory results in-

Understated cost of goods sold

Overstated Net income

Overstated Retained Earnings/Equity

Understatement of Ending Inventory results in-

Overstated cost of goods sold

Understated Net income

Understated Retained Earnings/Equity

Overstatement of Beginning Inventory results in-

Overstatement of cost of goods sold

Understated Net income

Understated Retained Earnings/Equity

Understatement of Beginning Inventory results in-

Understated cost of goods sold

Overstated Net income

Overstated Retained Earnings/Equity

The ratios will effect accordingly depending upon which inventory is wrongly stated- beginning or closing.