Financial Accounting: An Integrated Statements Approach, 2nd Edition

Following are descriptions of two independent situations that involve inventory misstatements.

1. Ending merchandise inventory is overstated by $20,000 on December 31, 2006. Ending mer-
   chandise inventory is correct on December 31, 2007.


2. Ending merchandise inventory is understated by $13,000 on December 31, 2006. Ending
   merchandise inventory is overstated by $16,000 on December 31, 2007.

For each situation, indicate the effects of the misstatements on the financial statements for 2006

and 2007. Use the following format for your answers:

Amount of Misstatement

Overstatement (Understatement)

2006 2007

Balance sheet (December 31):

Merchandise inventory _____ _____

Current assets _____ _____

Total assets _____ _____

Retained earnings _____ _____

Total stockholders’ equity _____ _____

Income statement:

Cost of merchandise sold _____ _____

Gross profit _____ _____

Net income _____ _____

Following are descriptions of two independent situations that involve inventory misstatements.

1. Ending merchandise inventory is overstated by $7,500 on December 31, 2006. Ending mer-
   chandise inventory is overstated by $10,000 on December 31, 2007.


2. Ending merchandise inventory is understated by $11,000 on December 31, 2006. Ending
   merchandise inventory is understated by $9,000 on December 31, 2007.

For each situation, indicate the effects of the misstatements on the financial statements for 2006

and 2007. Use the following format for your answers:

Amount of Misstatement

Overstatement (Understatement)

2006 2007

Balance sheet (December 31):

Merchandise inventory _____ _____

Current assets _____ _____

Total assets _____ _____

Retained earnings _____ _____

Total stockholders’ equity _____ _____

Income statement:

Cost of merchandise sold _____ _____

Gross profit _____ _____

Net income _____ _____

Merchandise of $65,000 was ordered on December 26, 2006, FOB destination, and was received

on December 30, 2006. The invoice from the vendor was not received until January 7, 2007, and

the related accounts payable journal entry was not recorded until January 7, 2007. However,

since the merchandise was on hand at December 31, 2006, it was included in the physical in-

ventory and properly assigned a cost.

Assume that the accounts payable was recorded on January 7, 2007, as a debit to Merchandise

Inventory and a credit to Accounts Payable for $65,000. Also, assume that the December 31, 2007,

248 Chapter 5 Accounting for Merchandise Operations

Exercise 5-33

Effects of inventory

misstatements

Goal 8

1. 2007 net income
   overstated, $2,500

Exercise 5-34

Effects of inventory

misstatements

Goal 8

Exercise 5-32

Effects of inventory misstate-

ments

Goal 8

1. 2006 net income
   overstated, $20,000