Check your answer
Write your response and explain your reasoning.
Northstar's supported year-end inventory is $84,000, but the draft statements report $76,800. Beginning inventory and purchases are correct. The related payable was recorded correctly. No tax rate or materiality conclusion is supplied.
Compute the signed inventory error as reported minus supported amount. Trace the inventory-only effect through current cost of goods sold, gross profit, pretax income, assets, and retained earnings before tax. For the second period, leave the error uncorrected in its opening balance and use the supplied correct close. Trace that period's cost of goods sold and pretax income.
Then state why the two-year pretax sum does not complete the correction. Identify the related-account, tax, materiality, comparative-statement, disclosure, and control questions that remain.
Compare your reasoning with the worked answer
Reported ending inventory is $7,200 too low, so its signed error is negative $7,200. Current cost of goods sold is $7,200 too high. Current gross profit, pretax income, inventory, assets, and retained earnings before tax are $7,200 too low.
Carrying the error into the later period puts negative $7,200 into its opening balance. If that period closes with the right amount, its cost of goods sold is $7,200 too low and pretax income is $7,200 too high. The two-year pretax error is zero. Neither annual statement was correct.
The payable was recorded correctly, so this supplied fact does not add a payable error. The arithmetic does not compute tax or EPS, decide materiality, authorize an out-of-period entry, or complete comparative and disclosure requirements. Research those decisions under the entity's reporting facts.