The following income statement was prepared for Hot Fireworks for the year 2011:

During the year-end audit, the following errors were discovered:
1. A \(\$ 2,000\) payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)
2. Sales to customers for \(\$ 500\) at December 31, 2011, were not recorded in the books for 2011 . Also, the \(\$ 300\) cost of goods sold was not recorded. The error was not discovered in the physical count because the goods had not been delivered to the customers.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by \(\$ 1,800\). (The Inventory account was mistakenly written down to the Cost of Goods Sold account.)

Required
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The first item for each error is recorded as an example.

Transcribed Image Text:

HOT FIREWORKS Income Statement For the Year Ended December 31, 2011 Sales Cost of goods sold Gross margin Operating expenses Net income $140,000 (77,200) 62,800 (40,900) $ 21,900