Chapter 6

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Effect of errors in physical inventory

Madison River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y8, Madison incorrectly counted its inventory as $678,000 instead of the correct amount of $687,000.

Enter all amounts as positive numbers.

a. State the effects of the error on the December 31, 20Y8, balance sheet of Madison River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Inventory	UnderstatedOverstatedNo Effect	$fill in the blank 2
Current Assets	UnderstatedOverstatedNo Effect	$fill in the blank 4
Total Assets	UnderstatedOverstatedNo Effect	$fill in the blank 6
Stockholders Equity	UnderstatedOverstatedNo Effect	$fill in the blank 8

b. State the effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8.

Income Statement Items	Overstated/Understated	Amount
Cost of Goods Sold	OverstatedUnderstatedNo Effect	$fill in the blank 10
Gross Profit	OverstatedUnderstatedNo Effect	$fill in the blank 12
Net Income	OverstatedUnderstatedNo Effect	$fill in the blank 14

c. If uncorrected, what would be the effects of the error on the 20Y9 income statement?

Income Statement Items	Overstated/Understated	Amount
Cost of Goods Sold	OverstatedUnderstatedNo Effect	$fill in the blank 16
Gross Profit	OverstatedUnderstatedNo Effect	$fill in the blank 18
Net Income	OverstatedUnderstatedNo Effect	$fill in the blank 20

d. If uncorrected, what would be the effects of the error on the December 31, 20Y9, balance sheet? 1. The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9. 2. The income for 20Y9 would be understated. 3. The current assets in 20Y9 would be overstated. 4. The current assets in 20Y9 would be understated.

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