Question

Effect of Errors in Physical Inventory

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $632,670 instead of the correct amount of $651,650.

Enter all amounts as positive numbers.

a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Merchandise Inventory		$
Current Assets
Total Assets
Owner's Equity

b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

c. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold		$
Gross Profit
Net Income

d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

1. The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.
2. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error overstates the beginning inventory in20Y3.
3. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error understates the beginning inventory in 20Y3.

Answer 1

Inventory error	18980	=651650-632670
a
Balance Sheet Items	Understated/Overstated	Amount
Merchandise Inventory	Understated	18980
Current Assets	Understated	18980
Total Assets	Understated	18980
Owner's Equity	Understated	18980
b
Income Statement Items	Understated/Overstated	Amount
Cost of Merchandise Sold	Overstated	18980
Gross Profit	Understated	18980
Net Income	Understated	18980
c
Income Statement Items	Understated/Overstated	Amount
Cost of Merchandise Sold	Understated	18980
Gross Profit	Overstated	18980
Net Income	Overstated	18980
d
The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.