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

Please find the detailed answer in the explanation section.

Step-by-step 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