Impact of Accounting Errors on Financial Statement Items and Ratios

Essay

Impact of accounting errors on financial statement items and ratios
Cayman Corporation makes the following errors during the current year. Each error is an independent case.

Ending inventory is overstated by $1,120, but purchases are recorded correctly.

Both ending inventory and a purchase on account are understated in the same amount.


Ending inventory is correct, but a purchase on account was not recorded. (Assume the purchase of $880 was recorded in the following year).

Instructions
Indicate the effect of each error on working capital, the current ratio (assume the current ratio is greater than 1), retained earnings, and net income for the current year and the following year.