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Beta Co has total assets of $555,000 and net profit of $160,000 recorded in the financial statements
for the year ended 31 December 20X3. Inventory costing $45,000, which was received into the
warehouse on 2 January 20X4, was included in the financial statements at 31 December 20X3 in error.
What would be the net profit and total assets after adjusting for this error?
Net profit Total assets
A $205,000 $600,000
B $115,000 $600,000
C $205,000 $510,000
D $115,000 $510,000
ANSWER
D Net profit $115,000 Total assets $510,000
The inventory received on 2 January 20X4 should not be included in the financial statements at 31
December 20X3 as it relates to the following year. The inventory value should be deducted from total
assets. To work out the effect on net profit, remember that cost of sales is calculated as follows:Cost of sales
Opening inventory X
Plus purchases X
Less closing inventory (X)is this correct? we deduct the inventory value from the total assets? first of all we must deduct from purchases, because when I am trying to find out cost of sales I’ll first add up my purchases and finally the purchase of 2014 year will be probably included,than deduction from purchases and closing inventory will give the same value.
It is correct.
The purchases figure will not change. The question does not say that we recorded what was actually bought wrongly.
If you watch our free lectures on inventory, you will see that the inventory is counted at the end of the period and then entered into the accounts. The only error is that the figure entered for inventory is wrong by $45,000.
So the asset on the SOFP needs reducing by $45,000.
Also, the closing inventory in the calculation of cost of sales is reduced by $45,000, which increases the cost of sales by $45,000 and therefore reduces the profit by $45,000.Again, the purchases figure is simply what was bought during the period and nothing in this question suggests that that has been recorded wrongly.
From your point of view you are right, if the inventory is counted physically and accountant maybe counted it on 3 January 2014, and forget to omit the last receive in warehouse.
“Inventory costing $45,000, which was received into the warehouse on 2 January 20X4, was included in the financial statements at 31 December 20X3 in error” does not state exactly that closing inventory includes $45000 and or receiving does not mean purchase? if it received, it is purchased and if we assume that not correct step was taken once about closing inventory, why have not I assume the second step is not correct too, about calculating cost of sales figure?
The question says that the inventory at 31 December included inventory that was not received until 4 January. It should not have been included if it had not been received and therefore inventory at 31 Dec in the SOFP needs reducing, and inventory in the cost of sales calculation needs reducing.
However, the question does not say that these goods had been included in purchases. Presumably the entry for the purchase (Dr Purchases Cr Cash or Payables) was made correctly after 31 December. Therefore the purchases figure included in the SOPL at 31 December was presumably correct.
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