Reference no: EM132532325

The manager of Felicity's Fashions Ltd, importer and wholesaler of fashion clothing for women, has been investigating the inventory levels of the business at the end of the previous year ended 30 June 2018.

She discovered, in consultation with the purchasing department, that an error had been made in the physical count on that date, which resulted in the inventory balance being overstated by $800 000. She also discovered that the inventory balance at 30 June 2019 had been correctly determined. She commented to the accountant that the profit figure for the year ending 30 June 2019 should also be correct, and that there is no point worrying about the error of $800 000 anymore.

Required

Question a) What effect does overstating the value of inventory at the end of 30 June 2018 have in the accounting reports?

Question b) What should be the correct profit figures for years 2018 and 2019? (show calculations)

Question c) Discuss the effect of errors in ratio analysis due to incorrect inventory valuations.