17 Feb Do you agree or disagree on the following pst? Ple
Do you agree or disagree on the following pst? Please explain. What are the effects of inventory errors? Errors in the inventory effects the income statement, the value of the assets and the owners equity on the balance sheet. The errors in the inventory perpetuate from one period to the next. The first periods inventory is carried over and provides the value for the beginning of the second period. In case there is an error in the inventory, for instance, the numbers are overstated; consequently the cost of goods sold would be understated (Horngren & Thomas, 2013). In other words, the allocation of the numbers between periods would incorrect. In case left unchanged, the calculation of gross profit and net income would be incorrect as well. However, between periods one and two the numbers counterbalance each other since it would be overstated in one period and understated in the following period, but they would not reflect the actual numbers, which is against the fundamental characteristics of accounting: relevance and faithful representation. Unfortunately, there are incidents where such errors are intentional. As Horngren & Thomas (2013) states, there is one thing to make an honest mistake, but quite different to use it to commit fraud. In this case, the effects of inventory errors have much greater consequences.