Question 2. Mountain Indoors Co. mistakenly recorded purchases of inventory on a

Question

Question 2. Mountain Indoors Co. mistakenly recorded purchases of inventory on account received during the last week of December 2016 as purchases during January of 2017 (this is called a purchases cut-off error). Cameron uses a periodic inventory system. Ending inventory however was correctly counted and reported each year.Assuming that no correction was made in 2016 or 2017, indicate whether each of the following financial statement amounts will be understated, overstated, or correct, explain.

A.    Retained Earnings for December 31, 2016.

B.    Retained Earnings for December 31, 2017.

C.    Net Income for 2016.

D.     Net Income for 2017.

Explanation / Answer

Retained Earnings for December 31, 2016 and Net Income for 2016: these both will be overstated because

COGS= purchases+ opening inventory- closing inventory and

Sales- COGS- other expenses and

Retained Earnings for December 31, 2017 and Net Income for 2017: these both will be understated because

COGS= purchases+ opening inventory- closing inventory and

Sales- COGS- other expenses and

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