Question

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 QUESTIONS:

As a result of counting its physical inventory incorrectly, Mill Corp. understated its inventory balance at 12/31/18 by $6,000. Its physical inventory count was correct in the subsequent year, 2019.

1. As a result of the 2018 error, what will be the effect on Mill’s cost of goods sold, net income, inventory, and retained earnings balances at the end of 2018? Ignore tax effects.

	Cost of Goods Sold	Net Income	Inventory	Retained Earnings
A.	Overstated $6,000	Understated $6,000	Understated $6,000	Understated $6,000
B.	Understated $6,000	Overstated $6,000	Overstated $6,000	Overstated $6,000
C.	Understated $6,000	Understated $6,000	Understated $6,000	Understated $6,000
D.	Overstated $6,000	Overstated $6,000	Overstated $6,000	Overstated $6,000
E.	Understated $6,000	Overstated $6,000	No effect	No effect

2. As a result of the 2018 error, what will be the effect on Mill’s cost of goods sold, net income, inventory, and retained earnings balances at the end of 2019? Ignore tax effects

	Cost of Goods Sold	Net Income	Inventory	Retained Earnings
A.	No effect	No effect	No effect	No effect
B.	Understated $6,000	Overstated $6,000	Overstated $6,000	Overstated $6,000
C.	Understated $6,000	Overstated $6,000	No effect	No effect
D.	Overstated $6,000	Understated $6,000	No effect	No effect
E.	Overstated $6,000	Understated $6,000	Overstated $6,000	Overstated $6,000

Answer 1

Answer 1
The answer is Option A.
Ending Inventory understated by $6000 results into overstatement of cost of goods sold by $6000 and eventually it lead to
understatement of net income and retained earnings by $6000.
Answer 2
The answer is Option C.
Beginning Inventory understated by $6000 results into understatement of cost of goods sold by $6000 and eventually it lead to
overstatement of net income by $6000.The understatement of net income in previous year and overstatement of net income in current year
lead to zero impact on retained earnings balance.There is zero impact on ending inventory for 2019 as physical inventory
count was correct in this year.