Question

Error in physical count in an auction company (consignee): goods held on consignment ($15,000) were included in physical inventory in 2019. Identify whether the following accounts are overstated, understated, or unaffected in 2019 and 2020 as a result of this inventory error.

                                                 2019                              2020

Beg Inventory

+ Purchase

-End Inventory

=COGS

Total Assets

Net Income

Retained Earnings

This was the only information given for this question. Everything needed to answer this question is already stated in the question.

Answer 1

As the Auction company was holding the consignment goods of $15000 as consignee, it should not have been co

unted as Auction Company's Inventory.

As as result of this error , the Ending Inventory of 2019 will be overstated.

So, 2019 COGS will be understated , the Net Income and Retained Earning of 2019 will be overstated and the Asset(Inventory ) of 2019 will be overstated.

As the closing inventory of 2019 will become the beginning inventory of 2020, unless the error is rectified in physical verification in 2020, th error will continue in 2020.

If the error remain undetected in 2020, the beginning stock and closing stock and Total Asstes will remain overstated , but the COGS , Net Income and Retained Earning will be unaffected.