How does an error in ending inventory affect net income?

  

Only have 20 dollarsI have put the numbers in for the month just need to look at the transcript that matches the problem and the the other paper that matches the problem. fill in the excel sheet.Ashford University | ACC205: Chapter 5 Exercise 1Accounting 205. This is Professor Blix, and I will review chapter 5, exercise 1.A recent review of the accounting records discovered that the [? 2000×3 ?] ending inventory have beenunderstated by 4,000. So this problem deals with the errors in ending inventory and what effect it has on netincome. We can see up here, they give us the income statement condensed for 2003, and they also give us thecondensed income statement for 2004. And because of this 4,000 error, they want us to correct the incomestatement.Let’s take a closer look at what effect an error in ending inventory has. So what I’ve done over here is I’vereplicated sales of 100,000. Beginning inventory is 0. And I made this up. I put purchases is 80, goods availablefor sale, ending inventory, cost of goods sold, gross profit, expense, net income.Now, I have two columns, one for what they booked with the understatement of 4,000 and what it should be. So Ichanged– they booked 18,000 ending inventory. It was understated. It should have been 22,000. You can see bythat error that cost of goods sold increased from 58 to 62. The gross profit decreased from 42 to 38. Expensesstayed the same. And you can see the effect of that on net income. 16,000 it should have been, and they reported12,000.So by understating inventory, you decrease net income. So the rule to remember is if you want to cheat andincrease ending– excuse me, if you want to cheat and increase net income, you overstate ending inventory.Some companies have done that in the past.You can see down here, I have corrected the income statement. And you see with the error corrected, net incomeshould have been, in 2003, 16,000, and it should have been 9,000 in 2004 versus the 12 and 13.Now, one thing about inventory errors, you notice that net income for these two years cumulative adds up to25,000. And down here, it adds up to 25,000. So it is a self-correcting error. It will correct over two years. But youcan see the understatement of ending inventory by the 4,000 decreased income. They reported 12, should havebeen 16. And in the second year, should have been 13– they reported 13, should have been 9. So you see how itaffects both years. OK. Thank you.The other transcript is below need to download. The numbers you input is in the download that says excel numbers20 mins agoATTACHMENTSacc205__chapter_5_exercise_1.pdfacc205__chapter_5_problem_2.pdfacc205__chapter_6_exercise_2.pdfacc205__chapter_6_problem_2.pdfacc205_week_three_guidance_report.xlsxexcel_numbers.docx

Introduction:
Errors in accounting records can have a significant impact on a company’s financial statements, resulting in understated or overstated income. In this report, we will focus on an exercise from Chapter 5 of Accounting 205 by Professor Blix. The review of the accounting records discovered that the ending inventory has been understated by $4,000, and we will explore the effect of this error on net income.

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Description:
In this exercise, we will examine the errors in ending inventory and their impact on net income. We will look at two income statements condensed for 2003 and 2004 to understand the correction process for this error. By understating inventory, net income decreases, and overstating it leads to an increase in net income. The self-correcting nature of inventory errors means that the issue will resolve over time. We will also highlight how important it is for companies to maintain accurate accounting records to avoid financial implications. Our report includes an Excel sheet and transcripts that provide the numbers and details necessary for a comprehensive understanding of the exercise.

Objectives:
– To understand the impact of errors in ending inventory on net income
– To learn how to correct income statements with inventory errors

Learning Outcomes:
By the end of this lesson, learners will be able to:
– Explain the relationship between ending inventory errors and net income
– Identify the effects of an understatement of ending inventory on net income
– Evaluate income statements for errors in ending inventory and correct them accordingly

Headings:
– Introduction to accounting records review
– Understanding errors in ending inventory
– Replicating a sample income statement to understand the impact of errors
– Correcting income statements with inventory errors
– Importance of correcting inventory errors in financial reporting.

Solution 1: Proper Inventory Management for Small Business Owners:

Small business owners often neglect proper inventory management, leading to understated or overstated ending inventory. This mistake can have an adverse impact on the net income of the business. Therefore, it is crucial to maintain an accurate record of inventory and update it regularly. It can include tracking inventory levels, monitoring expiration dates, being aware of seasonal demands, and forecasting future sales. Investing in an inventory management system can help automate these processes and streamline record-keeping. In addition, regular inventory checks and audits will ensure there are no errors or discrepancies in the accounting records.

Solution 2: Correcting Inventory Errors:

Inventory errors can happen even with the most diligent accounting practices. When an error like understated ending inventory is discovered, it is crucial to correct the income statement promptly. The correction process involves adjusting the ending inventory upwards and increasing the cost of goods sold in that particular period. The adjusted cost of goods sold should reflect the correct cost of goods sold for that particular period. It is also necessary to update the opening inventory for the next period to reflect the adjusted ending inventory of the previous period. This can help correct the understatement and prevent it from impacting net income in future periods. Regular inventory checks and audits can help identify any inventory errors and prevent them from impacting financial statements.

Suggested Resources/Books:

1. Accounting Handbook (Wiley)
2. Intermediate Accounting, Volume 1 by Donald E. Kieso
3. Financial Accounting: Tools for Business Decision-Making, 7th Canadian Edition by Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
4. Principles of Accounting by Gregory Skousen

Similar Asked Questions:

1. What is the impact of an error in ending inventory on net income?
2. How can companies overstate ending inventory to cheat and increase net income?
3. How do inventory errors self-correct over time?
4. What are some common accounting errors related to inventory?
5. How do accounting standards address inventory valuation and reporting?

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