Analyzing the Effects of an Error in Recording Purchases

Zocco Ski Company mistakenly recorded purchases of inventory on account received during the last week of December 2011 as purchases during January of 2012 (this is called a purchases cutoff error). Zocco uses a periodic inventory system, and ending inventory was correctly counted and reported each year.

Required:

Assuming that no correction was made in 2011 or 2012, indicate whether each of the following financial statement amounts will be understated, overstated, or correct.

1. Net Income for 2011.

2. Net Income for 2012.

3. Retained Earnings for December 31, 2011.

4. Retained Earnings for December 31, 2012.