Inventory Errors

Question 1

What is the basic inventory equation?

Answer 1

Beginning Inventory + Net purchases = Ending inventory + COGS

Question 2

If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on Cost of Goods Sold (COGS)?

Answer 2

The impact on COGS is understated.

Question 3

If an inventory error is discovered in year three, what is the impact on Retained Earnings?

Answer 3

There is no impact on Retained Earnings, the error has self-corrected.

Question 4

If an inventory error is discovered in year two, where is the difference recorded?

Answer 4

Beginning balance of Retained Earnings

Question 5

In year one of an error, if purchases are understated, what is the impact on Retained Earnings?

Answer 5

The impact on Retained Earnings is overstated