CPAnet Forum: Net income

Active Topics

Memberlist

Help

FAR STUDY GROUP
CPAnet Forum : FAR STUDY GROUP

Topic: Net income (

Topic Closed)

Author

Message

<< Prev Topic | Next Topic >>

taxygood
Newbie
Newbie

Joined: 14 Apr 2009
Location: United States
Online Status: Offline
Posts: 17

Posted: 14 May 2009 at 16:06 \| IP Logged

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?

Assets Liabilities Stockholders' Equity Net Income

a. No effect Understate Overstate Overstate.

b. No effect Overstate Understate Understate.

c. Understate Understate No effect No effect.

d. Understate No effect Understate Understate.

The answer is C

I do not undersand why

please help me

sanju06
Regular
Regular

Joined: 23 Sep 2008
Online Status: Offline
Posts: 181

Posted: 14 May 2009 at 20:37 \| IP Logged

The only entry passed for purchase of inventory under Perpetual method is:
Dr. Inventory
Cr.Accounts Payable/Cash
Here it is accounts payable as it says purchased on account.

That is the reason why omitting this entry affects assets and liabilities i.e understate them.
This does not enter the cost of goods sold yet. So it does not affect Net income/Stockholders equity.

Better explanations welcome!

jrupa
Major Contributor

Joined: 16 Aug 2007
Location: United States
Online Status: Offline
Posts: 444

Posted: 14 May 2009 at 21:01 \| IP Logged

i also think that sanju is rt...

Archer
Newbie
Newbie

Joined: 15 May 2009
Location: Egypt
Online Status: Offline
Posts: 1

Posted: 15 May 2009 at 09:11 \| IP Logged

sanju06 is totaly right

__________________
CPA Archer

FARB-FinAudRegB
Major Contributor

Joined: 25 Apr 2009
Location: United States
Online Status: Offline
Posts: 275

Posted: 15 May 2009 at 11:02 \| IP Logged

sanju is right.

IF, that is IF, you did it correctly, you would not have had the COGS because the inventory in question would have been represented both in purchases and in ending inventory. By omitting it completely, both purchases and ending inventory are understated by this same amount.

__________________
CPA Exam: Won Series 4-1

Search for other posts by FARB-FinAudRegB

Sorry, you can NOT post a reply.
This topic is closed.

Printable version

You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum