Inventory Assignment Example | Topics and Well Written Essays - 250 words

Inventory - Assignment Example Both the goods and invoice were received in early 19X3, with the invoice being re ­corded at that time. (b) The above errors had an overall effect of overstating the balance of owner’s equity as at December 31, 19X2. In the first error, it is assumed that only the purchases journal was wrongly entered. The effect of understating cost is to an understatement of cost of goods sold, hence overstating the net income, which is part of owner’s equity. The ownership of goods purchased on F.O.B terms revert to the buyer immediately the seller delivers them to the port of delivery. It is therefore assumed that the goods were already on transit by the end of business on December 31, 19X2. Therefore the exclusion of this transaction had no effect on the cost of goods sold since it was neither included as purchases nor closing inventory. It will only affect the value of inventory in the balance sheet with no effect and accounts payable or cash. There is no effect on owner’s equity. Excluding $3,000 from the closing inventory in 19X1 means that the cost of goods sold was understated with the ending result being an overstatement of net income, hence owner’s equity. Since the amount was not included in 19X2, it means that sales revenue was recognized on these goods with no corresponding