Page 26 - Accountancy for Advanced Secondary Schools Teachers Guide Form Five

2. Key concepts
Types of errors:

(a) Overstatement: Recorded inventory is higher than actual
inventory.
FOR ONLINE READING ONLY
(b) Understatement: Recorded inventory is lower than actual
inventory.

Effects:
(a) Income Statement: Changes in COGS and net income.

(b) Balance Sheet: Changes in inventory and retained earnings.

3 Research inventory error calculation:
(a) Sources:

(b) Textbooks: Accounting textbooks.
(c) Online Resources: Websites like Investopedia and educational
platforms.

(d) Professional Guidelines: NBAA, AICPA or IFRS resources.

4. Steps to calculate inventory errors
(a) Identify the Error:

(i) Compare physical inventory count to recorded amount.

(ii) Check for documentation errors.
(b) Calculate the Impact:

(i) Overstated Inventory: Subtract error amount from
COGS, increase net income.

(ii) Understated Inventory: Add error amount to COGS,
decrease net income.

Teacher’s Guide Form Five
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23/06/2024 17:45
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ACCOUNTANCY_TG_2024_FINAL DUMMY.indd 12 23/06/2024 17:45