EX 7-13 Effect of errors in physical inventory

Hydro White Water Co. sells canoes, kayaks, whitewater rafts, and other boating supplies.
During the taking of its physical inventory on December 31, 2012, Hydro White Water
incorrectly counted its inventory as $439,650 instead of the correct amount of $451,000.

a. State the effect of the error on the December 31, 2012, balance sheet of Hydro White
Water.
b. State the effect of the error on the income statement of Hydro White Water for the
year ended December 31, 2012.
c. If uncorrected, what would be the effect of the error on the 2013 income statement?
d. If uncorrected, what would be the effect of the error on the December 31, 2013, balance
sheet?

Answer:
a.                                                 Balance Sheet  
Merchandise inventory............. $11,350* understated  
Current assets .......................... $11,350 understated
Total assets............................... $11,350 understated
Owner’s equity.......................... $11,350 understated
*$11,350 = $451,000 – $439,650
b.                                               Income Statement  
Cost of merchandise sold........ $11,350 overstated
Gross profit............................... $11,350 understated
Net income................................ $11,350 understated

c.                                                Income Statement  
Cost of merchandise sold........ $11,350 understated
Gross profit............................... $11,350 overstated
Net income................................ $11,350 overstated

d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in 2013.

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