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In 2018, Winslow International, Inc.’s controller discovered that ending inventories for 2016 and 2017 were overstated...

In 2018, Winslow International, Inc.’s controller discovered that ending inventories for 2016 and 2017 were overstated by $200,000 and $500,000, respectively. Determine the effect of the errors on retained earnings at January 1, 2018. (Ignore income taxes.)

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Answer #1

Overstating ending inventory understates the cost of goods sold. This shall have an effect on profit by inflating it.

Thus for the yaer 2016 profit would be overstated by $200000

For year 2017, opening stock is overstaed by $200000 and ending inventory is overstated by $500000. The net effect would be overstating the profit by $300000

Thus as on Jan 1, 2018 retained earnings is overstated by a total of $500000 ($200000 + $300000)

To correct the error, retained earnings would eb reduced by $500000

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