Final answer:
The Kilian Company's financial statements will show understated assets, retained earnings, and net income due to the $10,000 inventory omission. This accounting error impacts the balance between assets, liabilities, and net worth as represented in a T-account. The correct answer is option A- understated assets; overstated retained earnings and net income
Step-by-step explanation:
When the Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was inadvertently left out of the physical count, this causes an error in the company's financial statements. Specifically, the effect in the current year will be understated assets, along with understated retained earnings and net income. This is because the cost of goods sold (COGS) would be overstated, reducing the net income, which in turn reduces the retained earnings. Assets are understated because the inventory is an asset and if it's not included, total assets will be reported at a lower value than they actually are.
Using a T-account as a reference, recall that assets appear on the left side and are balanced by the liabilities and net worth (or equity) on the right. In the context of Kilian Company, the omitted inventory would have increased the assets side of the T-account, had it been included. Assets always need to balance out with liabilities plus net worth; if the asset side is understated, it temporarily creates an imbalance in the accounting equation until the error is discovered and corrected.