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I was going through my study material, in the inventory section. I found this that I find it a bit confusing,
Cur-off error:
“A purchase invoice and liability are recorded before the year end but the goods are not received until after the year and so are not included in inventory”The Misstatement:
“Understatement of inventory (asset) and overstatement of cost of sales (i.e. profit is understated)”My initial response was,
The Misstatement:
Purchase invoice and liability shouldn’t be recognised until the goods are received, so purchases and liability are overstated and should only recognised the following year, and inventory is stated correctly for the current year.Please help me with this confusion. Thanks.
Welcome back to my forum!
In the absence of further information, both explanations of the misstatements are correct and have the same effect on profit (understated) and net assets (understated). And would get the same credit in the exam.
To choose between the two, it would depend on whether or not the entity has a legal obligation (liability) which would be clear either from the terms and conditions of the supplier’s sale or other specific circumstances – e.g. if the delivery was delayed at the buyer’s request.
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