Question

During its first and second years of operations, Rogers Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that overstated year 1 ending inventory by $80,000 and overstated year 2 ending inventory by $60,000. The combined effect of these errors on reported income is:

Answer 1

Net Income understated by $20,000

Step-by-step explanation:

In the first year, closing inventory was overstated by $80,000. The implications of the above would be,

Net Income for the first year would be overstated by $80,000

In the Second year,

Opening Stock would be overstated by $80,000

Due to this, cost of production stands overstated by $80,000.

Now, given in the question that closing stock for second year is overstated by $60,000 i.e profits are overstated by $60,000.

This means, the net effect on profits would be, $80,000 less $60,000 i.e $20,000 understated profits for the second year.