Question

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Answer 1

What is the effect of this omission on the net income for the year as calculated when the books are closed?

No effect upon the net income

Cost of Goods Sold =Openning Stock + Purchase -Closing Stock

Purchase -Closing Stock=+ 214000-214000 =0 No Impact on Income Statement

What is the effect on the company’s financial position as shown in its balance sheet?

Ending inventory and the accounts payable would be understated hence total asset and Liabilitiies will be understated in the Balance Sheet.

Is materiality a factor in determining whether an adjustment for this item should be made?

yes Because large item would distort the amount of current assets and the amount of current liabilities. and influence the current ratio to a considerable extent.