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Item 6

Item 6 25 points

Problem 5-24A Effect of inventory errors on financial statements LO 5-3

The following income statement was prepared for Frame Supplies for the year Year 1:

FRAME SUPPLIES
Income Statement
For the Year Ended December 31, Year 1
Sales	$	76,650
Cost of goods sold		(38,600	)
Gross margin		38,050
Operating expenses		(9,150	)
Net income	$	28,900

During the year-end audit, the following errors were discovered:

1. An $1,337 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 $2,635 at December 31, Year 1, were not recorded in the books for Year 1. Also, the $1,281 cost of goods sold was not recorded.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $1,529. (The Inventory account was mistakenly written down to the Cost of Goods Sold account.)

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Give the dollar amount of the effect and state whether the payment made for repairs erroneously charged $1,337 to the Cost of Goods Sold account would overstate (O), understate (U), or not affect (NA) the account. The first item of the error is recorded as an example. (Input the amount as a positive value.)

Error No. 1	Amount of Error	Effect
Sales, Year 1	NA	NA
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Same chart for errors 2 and 3.