Question

Ann M. Martin Company makes the following errors during the current year. (Evaluate each case independently and assume ending inventory in the following year is correctly stated.) 1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly. 2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.) 3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paid for in the following year.) Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

Answer 1

Answer:

Please find the detailed answer in the explanation section.

Explanation:

                                            CURRENT YEAR         SUBSEQUENT YEAR

1.   Working Capital             Overstated                    No effect

      Current Ratio                 Overstated                   No effect

      Retained Earnings         Overstated                  No effect

      Net Income                     Overstated                  Understated

2.   Working Capital             No effect                  No effect

      Current Ratio                  Overstated               No effect

      Retained Earnings         No effect                   No effect

      Net Income                      No effect                 No effect  

3.   Working Capital             Overstated                  No effect

      Current Ratio                  Overstated               No effect

      Retained Earnings         Overstated                   No effect

      Net Income                     Overstated              Understated