Question

Deuce Company counts its inventory of tires prior to preparing monthly financial statements on June 30. It uses the periodic inventory system. The warehouse actually contained 6884 tires, but the count team reported back to the accountant that there were 6284 tires and this number was used to adjust the accounting records. As a result of this, net income reported for the month ended June 30 would be:

a) understated
b) there is not enough information provided to make an assessment
c) overstated and then understated the next period
d) correctly stated
e) overstated

Answer 1

Due to the miscount of inventory, Deuce Company's net income for the month ended June 30 would be understated because the ending inventory was understated, leading to an overstatement of the cost of goods sold and thus reducing net income.

Step-by-step explanation:

The student asked whether the net income reported by Deuce Company for the month ended June 30 would be understated, overstated, or correctly stated as a result of counting 6284 tires when there were actually 6884 tires in inventory. With this miscount, the ending inventory is understated by 600 tires (6884 - 6284), assuming that no other errors were made. Since the periodic inventory system is used, the cost of goods sold (COGS) is calculated at the end of the period, it means that COGS would be overstated, as the ending inventory is undervalued. Consequently, the net income for the month would be understated because expenses (COGS) are overstated, reducing the net income.