Final answer:
The understatement of purchases plus understatement of ending inventory by the same amount is a common accounting error. It can lead to an understatement of assets and net income.
Step-by-step explanation:
The understatement of purchases plus understatement of ending inventory by the same amount is a common accounting error that can result in inaccurate financial statements. This error occurs when the amount of purchases made during a period is recorded too low and the ending inventory is also recorded too low by the same amount.
For example, let's say a company purchased $10,000 worth of inventory but mistakenly recorded it as $8,000. At the end of the period, the ending inventory is valued at $4,000 instead of the correct value of $6,000. The understatement of both purchases and ending inventory by $2,000 will lead to an understatement of the company's assets and net income.
By understating purchases and ending inventory, the company's cost of goods sold (COGS) will be too low, resulting in an overstatement of gross profit and net income. This can misrepresent the company's financial position and profitability.