Question

An item of inventory purchased this period for $15.00 has been incorrectly written down to its currentreplacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposalcosts of $3.00 and normal profit of $12.00. Which of the following statements is not true?

a.The cost of sales of the following year will be understated.
b.The current year's income is understated.
c.The closing inventory of the current year is understated.
d.Income of the following year will be understated

Answer 1

Option D.

Income of the following year will be understated

Step-by-step explanation:

The mistake will not affect the stated income of the following year.

This is because the income that will be recorded, is independent of the cost of purchasing item. It is recorded based on the selling price of the item.

Since the Item was sold for its normal selling price of $30, that amount will simply recorded as the income.

However, it is the profit that will most likely be affected. This is because the error in the cost of the product, will offset the recorded profit by a few dollars.

Answer 2

D) Income of the following year will be understated

Step-by-step explanation:

When inventory is written down*, the value of the inventory decreases. In this case, since the goods were written down at $10, this increased cost of goods sold by $10. When the good is actually sold next year, and profits are only recorded at $12, then income is being understated by $5.

Income = sales revenue - COGS - other disposal costs = $30 - $10 - $3 = $17, not $12 like it was recorded.

*Inventory is written down when its replacement price lowers or when merchandise is lost or stolen.