Question

Calculating Effect of Inventory Errors: For each of the following scenarios, determine the effect of the error on income in the current period and in the subsequent period. To answer these questions, rely on the inventory equation: Beginning inventory 1 Purchases 2 Cost of goods sold 5 Ending inventory

a. Porter Company received a shipment of merchandise costing $32,000 near the end of the fiscal year. The shipment was mistakenly recorded at a cost of $23,000.

b. Chiu, Inc., purchased merchandise costing $16,000. When the shipment was received, it was determined that the merchandise was damaged in shipment. The goods were returned to the supplier, but the accounting department was not notied and the invoice was paid.

c. After taking a physical count of its inventory, Murray Corporation determined that it had “shrink” of $12,500, and the books were adjusted accordingly. However, inventory costing $5,000 was never counted.

Answer 1

a)	In this case porter has undervalued the current year inventory by $ 9000 ($32000-$23000)
	Year	Particulars	Impact on income
	in current year	Undervalued Closing stock	Higher by $ 9000
	in subsequent year	Undervalued Opening stock	Lower by $ 9000
b)	Damaged goods returned but not accounted
	Year	Particulars	Impact on income
	in current year	Overvalued Purchases	Lower by $ 16000
	in subsequent year	Recovery from supplier	Higher by $ 16000
C)	Shrink found during physcial verification, inventory not accounted
	Year	Particulars	Impact on income
	in current year	Inventory shortage	Lower by $ 7,500*
	in subsequent year
	Net shortage is 7,500 only (12500 shortage but out of this 5000 was not accounted)