Question

Kuzu company discovers in 2015 that its ending inventory at december 31, 2014, was $7,000 understated. what effect will this error have on

Answer 1

Due to having an understated inventory at the end of 2014, there will be an overstated amount of the costs of good sold by $7,000. When the company said they had $7,000 less of inventory than they actually did, they then show they sold $7,000 more in inventory than they actually did. This error will change the amount of revenue the firm had and affect the share of stocks that the stockholder’s should be receiving.

Answer 2

The understatement of the ending inventory in 2014 will result to the overstatement of the cost of goods sold by $7,000 in 2014 as well as the understatement of the of the gross profit and net income.

Aside from affecting the income statement, this understatement of the ending inventory will also affect the balance sheet. This error will understate the total assets and overstate the stockholder's equity.