Question

For the year ending August 31, Mann Medical Co. mistakenly omitted adjusting entries for

(1) depreciation of $6,400,
(2) fees earned that were not billed of $11,500, and
(3) accrued wages of $3,900.

Indicate the effect of the errors on
(a) revenues,
(b) expenses, and
(c) net income for the year ended August 31.

Answer 1

Omitted entries would have increased revenues by $11,500, understated expenses by $10,300, resulting in a net income overstatement of $1,200. The firm's accounting profit is $50,000, calculated by subtracting explicit costs of $950,000 from revenues of $1,000,000.

Step-by-step explanation:

The effect of the omitted adjusting entries for Mann Medical Co. would have had the following impacts:

• Revenues would have been understated by $11,500 due to the fees earned but not billed.
• Expenses would have been understated by a total of $10,300 ($6,400 for depreciation and $3,900 for accrued wages).
• Net income would have been overstated by $1,200. This is because the increase in revenues ($11,500) minus the increase in expenses ($10,300) results in a net positive effect on net income.

Self-Check Question Answer:

The firm's accounting profit is calculated by subtracting the explicit costs (labor, capital, and materials) from the total revenues. Using this method:

Accounting profit = Total revenues - (Labor costs + Capital costs + Materials costs) = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.