Question

The income statement for the XYZ Company reflected the following:

[Please provide the details of the income statement]
Subsequent to the development of these financial statements, the following errors were discovered:
Ending Inventory for 2021 was understated by $10,000.
[Please specify any additional errors or provide the necessary information, and indicate any questions or calculations you'd like to address in relation to these errors.]"

Answer 1

An understatement of the ending inventory by $10,000 would cause a correction in the income statement leading to an increase in net income by the same amount. The initial accounting profit of the firm, before considering any errors, was $50,000.

Step-by-step explanation:

The question pertains to the impact of an inventory error on the accounting profit of XYZ Company. If the ending inventory was understated by $10,000, this would have initially caused the cost of goods sold (COGS) to be overstated and, consequently, the net income to be understated in the income statement for the year 2021. To correct the error, XYZ Company would need to decrease its COGS by $10,000, which increases the net income by the same amount for the year 2021.

Using the given example from the textbook, the firm's initial accounting profit was calculated by taking total revenues ($1,000,000) and subtracting explicit costs, which include labor ($600,000), capital ($150,000), and materials ($200,000), resulting in an accounting profit of $50,000.