Because of the dynamic relationship between cost of goods sold and merchandise inventory, errors in inventory counts have a direct and significant impact on the financial statements of the company. When ending inventory is overstated, this reduces the amount of inventory that would otherwise have been charged to the cost of goods sold during the period. 76) on january 1, 2012, legionnaire company purchased for p9,600,000 a machine with a useful life of ten years and.
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Comprehensive accounting reviewer series chapter 11: Inventory errors occur for many reasons and although they impact the income statement and balance sheet of a business, they do not affect the cash flow. Inventory errors are among the most common accounting mistakes and can significantly distort net income, cost of goods sold (cogs), and retained earnings.
Financial accounting and reporting merchandise amounting shipped to a customer fob destination on financial.
Thus, in contrast to an overstated ending inventory, resulting in an overstatement of net income, an overstated beginning inventory results in an understatement of net income. 2015 net income and december 31, 2015 retained earnings understated p48,000.
