[Anonymous]

Becker Question –

Garson Co. recorded goods in transit purchased F.O.B. shipping point at year end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?

Assets Retained earnings

a. No effect Understated

b. No effect Overstated

c. Understated No effect

d. Understated Understated

The correct answer is “d.” I know that Assets should be understated the goods are in transit and the delivery method is F.O.B. Shipping Point. However, why is retained earnings understated. The adjusted JE should be:

DR Inventory

CR Account Payable/Cash

As a result, COGS should only increase if the missing inventory in question is sold at the end of the year. However, the question does not explicitly state this as a fact…..Therefore, I think the answer should be “c.”

Thank you for all your help!!!

[Anonymous]

COGS = Beginning Inventory + Purchases – Ending Inventory

The problem says that the purchases were excluded from ending inventory, therefore COGS is overstated.

Sales – COGS = Net Income

So if you were to leave out 100 from ending inventory, cogs would be 100 more, and therefore net income would be lower than it should be.

[Anonymous]

Thanks! I really need to hammer in that formula into my puny brain…Agh, I am over thinking too much 🙁

[Anonymous]

Thanks! I really need to hammer in that formula into my puny brain…Agh, I am over thinking too much 🙁

[thehip41]

Beg INV +

Purch –

End inv (understated)

So we are subtracting less than we should be, which means the:

COGS Overstated

Expenses too high means:

RE Understated

We failed to record some assets so assets are undervalued.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Author]

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