Pharoah Company reported the following amounts for its cost of goods sold and ending inventory: 2021 2020
Question:
Pharoah Company reported the following amounts for its cost of goods sold and ending inventory:
2021 | 2020 | |||
---|---|---|---|---|
Cost of goods sold | $195,000 | $200,000 | ||
Ending inventory | 30,000 | 30,000 |
Pharoah made two errors: (1) 2020 ending inventory was overstated by $5,500, and (2) 2021 ending inventory was understated by $4,000.
Describe the impact of the errors on profit for 2020 and 2021 and on owner’s equity at the end of 2020 and 2021.
In 2020 profit is select an option: (overstated/understated )by $enter a dollar amount , the amount of the error in ending inventory. This error flows through to owner’s equity in 2020 to produce an select an option: understatement/overstatement of $enter a dollar amount .
In 2021 both errors have an impact. The net effect is an select an option: understatement/overstatement of profit by $enter a dollar amount . This is a result of the $5,500 select an option overstatement/understatement of the beginning inventory plus $enter a dollar amount , select an option understatement/overstatement of ending inventory.
Owner’s equity in 2021 would show only an select an option :understatement/overstatement of $enter a dollar amount . The $5,500 select an option : understatement/overstatement of 2020 would be offset by the $5,500 select an option :overstatement/understatement in profit caused by the impact on beginning inventory in 2021.
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118644942
6th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine