Learning Objective 5-8 (Appendix 5A)
1) Z Company uses a periodic inventory system. If ending inventory is overstated, net income will be ________.
A) overstated
B) understated
C) unaffected by the inventory error
D) impossible to determine from the information given
2) Which of the following 2011 financial statement line items will be affected if the 2011 ending inventory balance is overstated?
A) Cost of goods sold will be understated.
B) Current assets will be understated.
C) Net income will be understated.
D) Current liabilities will be overstated.
3) Which financial statement line item will be misstated if the 2011 ending inventory balance is overstated?
A) 2011 Balance sheet only
B) 2011 and 2012 Balance sheets only
C) 2011 and 2012 Income statements and 2011 Balance sheet only
D) 2011 and 2012 Income statements only
4) Newcastle Company has the following inventory data for the current period:
Beginning inventory$ 10,000
+ Purchases130,000
Cost of goods available for sale140,000
- Ending inventory20,000
Cost of goods sold$120,000
Assume that the ending inventory is understated by $5,000. What is the effect on the current period’s net income?
A) It will be overstated by $5,000.
B) It will be understated by $5,000.
C) It will be understated by $20,000.
D) The inventory error will have no effect on net income.
5) Newcastle Company has the following inventory data for the current period:
Beginning inventory$ 10,000
+ Purchases130,000
Cost of goods available for sale140,000
- Ending inventory20,000
Cost of goods sold$120,000
Assume that the ending inventory is overstated by $5,000. What is the effect on the current period’s net income and on the following period’s net income?
A) Net Income this period will be overstated by $5,000 and next period will be understated by $5,000.
B) Net income this period will be understated by $5,000 and next period will be understated by $5,000.
C) Net income this period will be overstated by $5,000, but next period will be correctly stated.
D) Net income this period will be understated by $5,000 and next period will be overstated by $5,000.
6) A company uses a periodic inventory system. If the ending inventory is understated, the error will affect only the current accounting period.
7) If ending inventory is overstated, the error will affect two income statement periods.
8) An error in ending inventory in 2011 will cause ending inventory in 2012 to be misstated as well.