Question

You are an accountant for Boats & Watercraft, Inc. At the end of each month, you receive a copy of the perpetual inventory records as well as a manual inventory count. This month, the unadjusted inventory balance is $298,275 and the physical inventory count has a balance of $297,950. You make the following journal entry to reflect this difference. What is the overall impact of this on stockholder equity?

Cost of Goods Sold $325
Inventory $325

Answer 1

The journal entry to adjust for the inventory discrepancy reduces Inventory by $325 and increases Cost of Goods Sold by the same amount, thereby decreasing net income and stockholders' equity at Boats & Watercraft, Inc.

Step-by-step explanation:

The discrepancy between the perpetual inventory records and the physical inventory count at Boats & Watercraft, Inc. has resulted in an adjusting journal entry that affects the company's financial statements. The entry debits Cost of Goods Sold (COGS) and credits Inventory for the difference of $325. This adjustment reduces the Inventory asset account to match the physical count and increases COGS, which decreases the overall gross profit. As a result, this adjustment will decrease the net income for the month, which in turn reduces stockholders' equity, because net income is an element of retained earnings, a component of stockholders' equity.