Asked by Bryce Takeyama on May 10, 2024
Verified
A new accountant who prepared the financial statements for Saltech Company at the end of its first year of operations made several errors.For each of the following items,indicate whether the income statement and balance sheet are affected by the error,and also the amount by which the respective financial statement is affected.(For example,an error might cause revenues and net income on the income statement and retained earnings and accounts receivable and assets on the balance sheet to be overstated by x dollars).Ignore the effects of income taxes.
Items to determine which financial statement is affected,the error amount,and whether the account is overstated or understated:
a.The company had sales for cash of $3,000,000.It also had sales on account of $1,800,000 that had been collected by the end of the year,and sales on account of $200,000 that are expected to be collected early the following year.The accountant reported total sales revenue of $4,800,000.
b.The company had total inventories of $600,000 at the end of the year.Of this amount,inventory reported at $30,000 was obsolete and will have to be scrapped.The balance sheet prepared by the accountant showed total inventories of $600,000.
c.The company has a bank loan for which interest expense during the year of $10,000 will be paid early in January of the next year.The accountant recorded neither the interest expense nor the interest payable.
d.An insurance policy was listed as an asset of $6,000 at the beginning of the year.The entire amount of the policy was for the current year and the policy has expired.The accountant took no action to recognize the expiration of the policy.
Sales Revenue
The earnings obtained through the sale of products or services during a certain timeframe.
Inventories
Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Insurance Policy
A contract between an insurer and a policyholder that outlines the terms and conditions under which the insurer agrees to compensate the policyholder for losses under specified circumstances.
- Master the initial steps in preparing financial statements and understand how distinct transactions modify these statements.
Verified Answer
RT
Raphael TaiwoMay 16, 2024
Final Answer :
a.On the income statement,revenues and net income are understated by $200,000.On the balance sheet,accounts receivable and retained earnings are understated by $200,000.
b.On the balance sheet,inventory and retained earnings are overstated by $30,000.On the income statement,expenses are understated and the net income is overstated by $30,000.
c.On the income statement,expenses are understated and net income is overstated by $10,000.On the balance sheet,interest payable is understated and retained earnings are overstated by $10,000.
d.On the balance sheet,prepaid insurance and retained earnings are overstated by $6,000.On the income statement,expenses are understated and net income is overstated by $6,000.
b.On the balance sheet,inventory and retained earnings are overstated by $30,000.On the income statement,expenses are understated and the net income is overstated by $30,000.
c.On the income statement,expenses are understated and net income is overstated by $10,000.On the balance sheet,interest payable is understated and retained earnings are overstated by $10,000.
d.On the balance sheet,prepaid insurance and retained earnings are overstated by $6,000.On the income statement,expenses are understated and net income is overstated by $6,000.
Learning Objectives
- Master the initial steps in preparing financial statements and understand how distinct transactions modify these statements.