Question

During 2024, Passage Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2021 $60,000 understated 2022 $75,000 overstated Prior to any adjustments for these errors, working capital at December 31, 2023, would be:

Answer 1

Answer: $75,000 overstated

Step-by-step explanation:

Inventory errors will correct themselves automatically over a 2 year period because they will balance each other out. For instance an inventory overstatement in one year will increase revenue but because it will be higher than it should be as the opening balance of the next year, it will reduce revenue by an equal amount in that year.

The only relevant error therefore is the 2022 error.

Inventory is overstated by $75,000 which means it will inflate the Net Working Capital by the same amount.