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Analyzing Impact of Inventory Errors on Reporting

The records of Largo Company reveal the following.

Sales revenue		$164,000
Cost of goods sold
Beginning inventory	$8,000
Purchases	84,000
Goods available for sale	92,000
Ending inventory	20,000	72,000
Gross margin		92,000
Operating expenses		48,000
Income (pretax)		$44,000

The following errors were found, and they have not yet been corrected.

1. Revenues of $4,000 collected in advance are included in Sales Revenue. 2. Accrued operating expenses of $5,600 are not recorded. 3. Goods costing $8,000 are incorrectly included in ending inventory. (They are being held on consignment.) No purchase was recorded. 4. Goods costing $4,000 are correctly included in ending inventory; however, no purchase was recorded (assume a credit purchase).

a. Prepare a revised income statement on a correct basis.

Note: Do not use negative signs with your answers.

Sales revenue		Answer
Cost of goods sold
Beginning inventory	Answer
Purchases	Answer
Goods available for sale	Answer
Ending inventory	Answer	Answer
Gross margin		Answer
Operating expenses		Answer
Income (pretax)		Answer

b. Determine the amount of overstatement or understatement in the following balance sheet accounts: (1) Inventory, (2) Accounts Payable, (3) Deferred Revenue, (4) Accrued Expenses, and (5) Retained Earnings.

Note: If a correction is not required, select "N/A" and leave the amount answer blank (zero).

Note: Do not use negative signs with your answers.

Account	Overstated or Understated	Amount
Inventory	AnswerOverstatedUnderstatedN/A	Answer
Accounts payable	AnswerOverstatedUnderstatedN/A	Answer
Deferred revenue	AnswerOverstatedUnderstatedN/A	Answer
Accrued expenses	AnswerOverstatedUnderstatedN/A	Answer
Retained earnings	AnswerOverstatedUnderstatedN/A	Answer

Please answer all parts of the question.

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