Question
Harrowgate Stores uses a periodic inventory system. During the 2026 year-end count, the team discovers that one aisle had been counted twice at December 31, 2025, so ending inventory for 2025 was overstated by $18,000. The 2026 count is correct. Ignore income tax.
| 2025 | 2026 |
|---|
| Profit as reported / calculated | $140,000 | $155,000 |
The 2026 figure was calculated using the (wrong) opening inventory carried forward from 2025.
Required:
- Effect on 2025 — how the error misstates the 2025 financial statements.
- Effect on 2026 — how the carried-forward error misstates the 2026 financial statements, if nobody corrects it.
- Corrected 2026 Profit — Harrowgate’s 2026 profit once the opening inventory is fixed.
Statements in this challenge
- Effect on 2025Statement Impact
- Effect on 2026Statement Impact
- Corrected 2026 ProfitNumeric Answer
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors
A prior-period error is corrected retrospectively: restate the comparatives and adjust the opening balance of retained earnings, rather than running the correction through the current year's profit. Establish first whether the error is prior-period or current-period, because that decides everything that follows.
Common mistakes
- Putting a prior-period correction through current profit or loss instead of opening retained earnings.
- Correcting only one side of a two-sided error, or correcting an error that has already counterbalanced itself.
- Confusing an error with a change in estimate — estimates are adjusted prospectively and are never restated.
Further readingIAS 8: policies vs estimates vs errors