Inventory errors

Question

The records of Alyssa Company show the following amounts in its December 31 financial statements:

2012:

Total assets: $850,000

Owner's equity: $650,000

cost of goods sold: $500,000

Profit: $70,000 

2013: 

Total assets: $900,000 

Owner's equity: $700,000 

cost of goods sold: $550,000 

Profit: $80,000

2014: 

Total assets: $925,000 

Owner's equity: $750,000 

cost of goods sold: $550,000

Profit: $90,000

Alyssa Company made the following errors in determining its ending inventory:

1. The ending inventory account balance at December 31, 2012, included $20,000 of goods held on consignment for Gillies Company.

2. The ending inventory account balance at December 31, 2013, did not include goods sold and

shipped on December 30, 2013, FOB destination. The selling price of these goods was $40,000 and the cost of these goods was $32,000. The goods arrived at the destination on January 4,2014.

AII purchases and sales of inventory were recorded in the correct fiscal year.

Instructions:

(a) Calculate the correct amount for each of the following for 2014,2013, and 2012:

1. Total assets

2. Owner's equity

3. Cost of goods sold

4. Profit

(b) Indicate the effect of these errors (overstated, understated, or no effect) on cash at the end of 2012, 2013,and2014.

Answer 1

Hello! Great questions. Here are some tips:

1. Consigned goods are NOT inventory. Therefore, $20,000 ("$20K") of inventory is overstated at 12/31/2012. That means the entry to record the consigned goods must be reversed. Inventory will go down and you would need to specify the offsetting side of the transaction -- presumably, Cost of Goods Sold ("COGS") or Accounts Payable.
2. The second point is more clear-cut, complete. Given FOB destination, we need to add back to Inventory $32K, reduce COGS by $32K = dr. Inv and cr. COGS. Next, we need to reduce Sales by $40K and, presumably, accounts receivable ("AR") by $40K = dr. Sales and cr. AR.

Want more help? I would love to be of service!

-Basil