A new accountant who prepared the financial statements for Saltech Company at the end of its first year of operations m

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answerhappygod
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A new accountant who prepared the financial statements for Saltech Company at the end of its first year of operations m

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A new accountant who prepared the financial statements for Saltech Company at the end of
its first year of operations made several errors. For each of the following items, indicate whether
the income statement and balance sheet are affected by the error, and also the amount by which
the respective financial statement is affected. (For example, an error might cause revenues and
net income on the income statement and retained earnings and accounts receivable and assets on
the balance sheet to be overstated by x dollars). Ignore the effects of income taxes.
Items to determine which financial statement is affected, the error amount, and whether the
account is overstated or understated:

a. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that
had been collected by the end of the year, and sales on account of $200,000 that are expected to
be collected early the following year. The accountant reported total sales revenue of $4,800,000.
b. The company had total inventories of $600,000 at the end of the year. Of this amount,
inventory reported at $30,000 was obsolete and will have to be scrapped. The balance sheet
prepared by the accountant showed total inventories of $600,000.
c. The company has a bank loan for which interest expense during the year of $10,000 will be
paid early in January of the next year. The accountant recorded neither the interest expense nor
the interest payable.
d. An insurance policy was listed as an asset of $6,000 at the beginning of the year. The entire
amount of the policy was for the current year and the policy has expired. The accountant took no
action to recognize the expiration of the policy.
Answer:
a. On the income statement, revenues and net income are understated by $200,000. On the
balance sheet, accounts receivable and retained earnings are understated by $200,000.
b. On the balance sheet, inventory and retained earnings are overstated by $30,000. On the
income statement, expenses are understated and the net income is overstated by $30,000.
c. On the income statement, expenses are understated and net income is overstated by $10,000.
On the balance sheet, interest payable is understated and retained earnings are overstated by
$10,000.
d. On the balance sheet, prepaid insurance and retained earnings are overstated by $6,000. On the
income statement, expenses are understated and net income is overstated by $6,000.
Difficulty: 3 Hard
Topic: Distinguish different financial statements
Learning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP)
in determining financial statement content and how companies ensure the accuracy of their
financial statements.
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