Asked by Ericka Harris on Apr 27, 2024
Verified
The accountant for Sue Company made the following errors related to inventory in 2010: 1. The beginning inventory for 2010was 2010 \mathrm{was} 2010was overstated by $375 \$ 375 $375 due to an error in the physical count.
2. A $650 \$ 650 $650 purchase of merchandise on credit in 2010 was not recorded or included in the ending inventony.
Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2010 by these errors?
Cost of Goods Sold Gross Profit Net Income \hlineI. Overstated Understated Understated II. Overstated Understated No effect III. Understated Overstated Overstated IV. No effect No effect No effect \begin{array}{lll}&\text { Cost of Goods Sold }&\text { Gross Profit }&\text { Net Income }\\\hlineI.&\text { Overstated } & \text { Understated } & \text { Understated } \\II.&\text { Overstated } & \text { Understated } & \text { No effect } \\III.&\text { Understated } & \text { Overstated } & \text { Overstated } \\IV.&\text { No effect } & \text { No effect } & \text { No effect }\end{array}\hlineI.II.III.IV. Cost of Goods Sold Overstated Overstated Understated No effect Gross Profit Understated Understated Overstated No effect Net Income Understated No effect Overstated No effect
A) I
B) II
C) III
D) IV
Periodic Inventory System
An inventory accounting system where updates to the inventory account occur at specific intervals, such as monthly or annually, rather than continuously.
Cost Of Goods Sold
The direct costs attributable to the production of the goods sold by a company, including material and labor costs.
Gross Profit
The profit a company makes after deducting the costs associated with making and selling its products or providing its services.
- Identify and correct errors related to inventory accounting under a periodic inventory system.
Verified Answer
CB
Christopher BogansMay 01, 2024
Final Answer :
A
Explanation :
The beginning inventory being overstated increases the cost of goods sold, while not recording a purchase decreases the cost of goods sold. However, the net effect is an overstatement in cost of goods sold because the beginning inventory error is not offset by the purchase not recorded. This leads to gross profit and net income being understated.
Learning Objectives
- Identify and correct errors related to inventory accounting under a periodic inventory system.