9SE_2 - Horngren'S Financial And Managerial Accounting

Question

Question: New York Pool Supplies’s merchandise inventory data for the year ended December 31, 2019, follow:

Net Sales Revenue\( 58,000

Cost of Goods Sold:

Beginning Merchandise Inventory\) 4,900

Net Cost of Purchases      32,500

Cost of Goods Available for Sale37,400

Less: Ending Merchandise Inventory       4,700

Cost of Goods Sold32,700

Gross Profit $ 25,300

Requirements

2. How would the inventory error affect New York Pool Supplies’s cost of goodssold and gross profit for the year ended December 31, 2020, if the error is not correctedin 2019?

Step-by-Step Solution

Answer

If the error is not corrected in 2019, the COGS would be overstated and gross profit would be understated by $1,800 in 2020.

Step-by-Step-Solution Step1: COGS in 2020 if the error is not corrected

If the error is not corrected then the opening inventory for 2020 would also be overstated by $1,800.

 

In such a case, the COGS for 2020 would be overstated by the same amount i.e. $1,800. This is so because the ending inventory is added purchased value to compute COGS.

Step 2: Gross profit in 2020 if the error is not corrected

As discussed above, the COGS would be overstated in 2020 if the error is not corrected. 

So in his case, the gross profit for 2020 would be understated by the same amount which is $1,800. This is so as the gross profit is the difference between the net revenue and COGS.