EX 7-15 Error in inventory
During 2012, the accountant discovered that the physical inventory at the end of 2011
had been understated by $18,000. Instead of correcting the error, however, the accountant
assumed that an $18,000 overstatement of the physical inventory in 2012 would balance
out the error.
Are there any flaws in the accountant’s assumption? Explain.
Answer:
When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $18,000.
Failure to correct the error for 2011 and purposely misstating the inventory and the cost of merchandise sold in 2012 would cause the income statements for the two years to not be comparable. The balance sheet at the end of 2012 would be correct, however, since the 2011 inventory error reverses itself in 2012.
had been understated by $18,000. Instead of correcting the error, however, the accountant
assumed that an $18,000 overstatement of the physical inventory in 2012 would balance
out the error.
Are there any flaws in the accountant’s assumption? Explain.
Answer:
When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $18,000.
Failure to correct the error for 2011 and purposely misstating the inventory and the cost of merchandise sold in 2012 would cause the income statements for the two years to not be comparable. The balance sheet at the end of 2012 would be correct, however, since the 2011 inventory error reverses itself in 2012.
