6.6 Determine the effect of inventory errors on the financial statements
1) The ending inventory of one year becomes the beginning inventory of the next year.
2) Counting inventory on December 31 that was shipped FOB shipping point would not cause any error in the final inventory valuation.
3) An error on inventory in one year does not have any effect on the inventory at the start of the next year.
4) Inventory errors cancel out at the end of the________ accounting period(s).
A) 1st
B) 2nd
C) 3rd
D) 4th
E) 5th
5) Which of the following is an INCORRECT statement if ending inventory is overstated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income is overstated.
D) Income tax is overstated.
E) Retained earnings is overstated.
6) Which of the following is an INCORRECT statement if ending inventory is understated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income understated.
D) Income tax is understated.
E) Retained earnings is understated.
7) Which of the following would NOT cause an error in the physical inventory count on December 31?
A) Counting inventory purchased that was shipped FOB destination on December 31
B) Double counting an aisle of product
C) Counting inventory purchased that was shipped FOB shipping point on December 31
D) Forgetting to tag a section of inventory
E) Forgetting to count an inventory item
8) An error in the reported inventory will cause errors in all of the following EXCEPT the:
A) balance sheet.
B) statement of retained earnings.
C) following year's financial statements.
D) cash account.
E) income statement.
9) If the ending inventory in Period 1 is understated, gross profit for Year 1 is __________.
10) If a misstatement of inventory occurs, the net income for __________ periods will be misstated.