Example Of Essay On Inventory Errors

There are only two forms of inventory errors that can be found in the financial statements. One is understatement of the inventory available, and the other is overstatement of the inventory available. These errors effect both the income statement (profit and loss account) and statement of financial position (balance sheet) of a company.
An overstatement of inventory will reduce the cost of sales. It will show that less inventory has been used up in generating the sales for a fiscal year or an accounting period. This will show the wrong increase in the gross profit of the company, and ultimately it will be reflected in an inflated net profit. Similarly, if there is an understatement of inventory, it will increase the cost of sales. It will show the wrong gross profit and net profit figures in the income statement. An overstatement of the inventory is going to increase the value of current assets and the value of total assets. Similarly, an understatement will reduce the current assets and total assets. In both cases, the true financial picture of the company will not be clear if there are accounting errors in the company’s financial statement.
Suppose that the balance of inventory at the end of a fiscal year is $400. The accountant erroneously uses the figure of $500 for the inventory in hand at the end of the period. First of all, it means that more inventories is available then there is. The actual cost of sales for the company is $1900. However, this overstatement of inventory will mean that only $1800 will be added in the cost of sales. This will increase the gross profit and net profit by $100. Same goes for the understatement of inventory.