P67A Jan 21 Mod
.xlsx
School
University of the Fraser Valley**We aren't endorsed by this school
Course
ACCT 201A
Subject
Accounting
Date
Dec 23, 2024
Pages
2
Uploaded by Jerin2003
202120202019Total assets925,000 900,000 850,000 Owner's equity750,000 700,000 650,000 Cost of goods sold550,000 550,000 500,000 Profit90,000 80,000 70,000 A key to understanding inventory error analysis, is to remember that the accounting recordsare always adjusted to agree to the physical inventory count. FOR EXAMPLE:Item 1. indicates that $20,000 of goods @ 12-31-19 were held in error. The consignment goods would never have been initially recorded by the company. When the physical year end coun was done however, the goods*** Because the accounting records are adjusted to agree to the physical count, the accounting records would have been INCREASED to include the consignment goods, and are therefore OVERSTATED. Another key to this analysis is to understand that, unless corrected, any errors existingFOR EXAMPLE:We concluded above that Item was means that the ending inventory in 2019was OVERSTATED. This means that the beginning inventory for 2020 areare OVERSTATED (since last year's ending inventory is the next year's beginning). One helpful way to think about these problems is to consider the accounting equation A = L + E ; When you detect an error, ask yourself, what is the effect of the error on the financial statements. FOR EXAMPLE:We concluded in Item 1 that Assets were OVERSTATED (since they included goods not So if Assets are OVERSTATED by $20,000, then something else must also be out of balance. Consider that the year end adjusting entries to inventory are always put through cost of goods sold. So if a year end adjustment for Item 1 OVERSTATED assets with a Dr to Inventory, the other side of the adjustment would have been a Cr to Cost of Goods Sold. Since COGS is an EXPENSE, the Cr REDUCES expenses. Less Expense means More Profit. More Profit means more equity. OVERSTATED by $20,000 (because of including extra assets) and Equity is OVERSTATED by $20,000 (because of higher profit from the inventory adjustment). BOTH SIDES of the equation are OVERSTATED by $20,000. We can solve the full problem with the following analysis:2019Total assetsOwner's equityProfitREPORTED IN ERROR850,000 650,000 500,000 70,000 Adj Re #1(20,000) (20,000) 20,000 (20,000)CORRECT BALANCES830,000 630,000 520,000 50,000 Since assets were OVERSTATED, the adjustment to find the CORRECT amounts is to REDUCE the assets. The correcting journal entry would be Dr Cost of Goods Sold \\ Cr Merchandise Inventory2020Total assetsOwner's equityProfitBRIEF ASIDE (More In Depth Below)REPORTED IN ERROR900,000 700,000 550,000 80,000 in 2020 when we count INV, the extra $20K thati)Adj Re #1- - (20,000) 20,000 exists on the balance sheet will not exist (since it never ii)Adj Re # 232,000 32,000 (32,000) 32,000 should have been counted to begin with) ; therefor an adjustmentCORRECT BALANCES932,000 732,000 498,000 132,000 would have happened in 2020 Dr COGS Cr INV ; this effecti) See ASIDE below for in depth explanation of this adjustment.is alreadt reflected in the 2020 COGS that was reported - $550,000Even though Profit it OVERSTATED, Owner's Equity is NOT OVERSTATED. How can this be? Since Owner's Equity was UNDERSTATED in 2019, the 2020 overstatement of NOTE: These Excel Solutions may be incomplete. The Excel solutions tend to focus on the NUMBERS and CALCULATIONS. Please also review the provided TEXTBOOK SOLUTIONS (Words Documents) available on VIULearn These are the amounts REPORTED IN ERRORheld on consignment (not owned by Alyssa) were included in error. on the balance sheet at year end will carry over to the following year. owned by Alyssa). We know the accounting equation must remain balanced.Therefore the accounting equation A = L + E remains balance while in error!Assets are Cost of goods soldCost of goods soldTHEREFORE if we corrected the error in 2019 as we should havethen
the way to make the 2020 books correct is to REDUCE COGS. Rememberprofit only serves to bring Owner's Equity back to where it should be. above that their 2020 correction included a Dr to COGS. But if we have foundthe error in 2019 this correction never would have happened. Thereforeii) When goods are shipped FOB Destination, they belong to the SELLER (Alyssa) until we need to "undo" their 2020 correction (which was Dr COGS) with Cr COGSthey arrive at the customer. Therefore these SHOULD HAVE BEEN INCLUDED in the physical countat year end since they did not arrive at the customer until January. Alyssa owns them at year end. to agree with the physical count, therefore the ENDING INVENTORY is UNDERSTATED. Since assets were UNDERSTATED, the adjustment to find the CORRECT amounts is to INCREASE the assets. The correcting journal entry would be Dr Merchandise Inventory \\ Cr Cost of Goods Sold2021Total assetsOwner's equityProfitREPORTED IN ERROR925,000 750,000 550,000 90,000 i) Adj Re # 2- - 32,000 (32,000)CORRECT BALANCES925,000 750,000 582,000 58,000 i) The rational for this adjustment is similar to the explanation i) above and relating to the ASIDE below. Aside:It is important to understand how an inventory error in 2019 can effect the Cost of Goods Sold in 2020. Understanding exactly how this happens hinges on remembering that the accounting records will alwaysbe adjusted to whatever the physical count was. Let's analyze Item # 1 to understand how. AS REPORTED IN ERRORIt will be helpful to make some assumptions about the INVENTORY balances to illustrate this example. Keep in mind our general inventory formula Opening Balance + Purchases = Ending Balance + COGSThis can be rewritten as Ending Balance = Opening Balance + Purchases - COGS20192020Total Assets (AS REPORTED IN ERROR)850,000 900,000 Total COGS (AS REPORTED IN ERROR)500,000 550,000 Assuming the Opening Inventory Balance in 2019 was $600,000 (any number smaller than total assets should work)Let's Also Assume that Purchases were $600,000 in 2019 and 2020. As Reported (Error)Opening Balance - 2019600,000 Add: Purchases600,000 (500,000)700,000 700,000 Add: Purchases600,000 (550,000)750,000 Keep the ENDING 2020 balance of $750,000 in mind. Although we have simply "arrived"at this number using some arbitrary assumptions (Opening 2019 Balance, and 2019 & 2020 Purchases)NOW LET'S SEE HOW THE 2019 ERROR (Ending Inventory OVERSTATED by $20,000) can impact COGS in 2020.IF we had not overstated the Ending 2019, what would the 2020 Inventory Account have looked like?680,000 ($700,000 IN ERROR less the $20,000 overstatement)Add: Purchases600,000 there is no reason to assume errors in purchases(550,000)730,000 BUT REMEMBER - we have to assume that the PHYSICAL COUNT was the $750,000 calculated above. So IF we had corrected the ending 2019 inventory, and therefore had a corrected 2020 opening balance, the calculated ENDING 2020 inventory would have been $20,000 LOWER. BECAUSE we always adjust the accounting records to the PHYSICAL COUNT, there would have been an adjusting entry required; Dr Inventory (to increase in from $730,000 to $750,000) \\ Cr Cost of Goods SoldTHIS is how a 2019 error will also impact the 2020 income statement. These goods were excludedfrom the year end count in error. REMEMEBER - The accounting records are adjusted Cost of goods soldLess: COGS (In Error re #1)Ending Inventory (In Error re #1) - 2019Opening Balance - 2020 (In Error re #1)Less: COGS (In Error re #2)Ending Inventory (In Error re#2) - 2020this number is at least consistentwith the facts of the problem. This would have been the number that was PHYSICALLY COUNTED. Opening Balance - 2020 (Error Corrected re #1!)Less: COGS (In Error re #2)the change in the OPENING BALANCE of Inventory would NOT change the actual SALES made and recorded to COGS during the yearEnding Inventory (In Error re #2) - 2020