Question

Pow Corp. accidentally overstated its 2018 ending inventory by $750. Assume that ending 2019 inventory is accurately counted. The error in 2018 will have what effect on Pow Corp.? a. 2018 net income is understated by $750. b. 2018 net income is overstated by $750. c. 2019 net income is understated by $750. d. Both b and c are correct.

Answer 1

b. 2018 net income is overstated by $750

Step-by-step explanation:

As the ending inventory is overstated the COGS will be understated thus, the income was overstate as well. Because the expenses reduced from the sales revenues were lower than correct.

Also we can deduct the same logic considering the accounting equation

Assets = liab + equity

if asssets are 750 higher than it should, then Equiy is higher as well

+750 = +750

Equity is affected for the net income and dividends. Thus, we can also conclude the net income is overstated by 750