(Considering the effect of inventory errors, LO 1, 4, 7) Abney Ltd. (Abney) is a small manufacturing company. In the fiscal year just ended a number of errors were made in accounting for inventory. For each of the following errors, indicate the effect on the financial statement elements and ratios shown in the table below.

Indicate whether the financial statement element or ratio would be overstated

(higher than it would have been had the error not occurred), understated (lower than it would have been had the error not occurred), or not affected by the error.

Abney uses a periodic inventory system and direct costing. Abney applies the lower of cost and market rule on an item-by-item basis.

a. Some of the inventory in Abney’s warehouse was not counted during the yearend inventory count.

b. Certain fixed costs were included in inventory.

c. The purchase of some inventory on credit was not recorded (both the inventory and the payable) but the inventory was included in the year-end inventory count.

d. Certain direct labour costs were expensed as incurred.

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a. b. C. d. Net income Cost of Total sales assets Owners' Current equity Inventory Debt-to- ratio turnover ratio equity ratio