Question

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the income statement. (Check all that apply.) Multiple select question. The current year's cost of goods sold will be too low. The current year's cost of goods sold will be too high. The current year's net income will be too high.

Answer 1

The current year's net income will be too low.

The current year's cost of goods sold will be too high.

Step-by-step explanation:

1. As we know that the net income would be based upon the ending inventory as the Q-mart made an error by not recognizing the inventory that should be kept in a separate warehouse so it reduce the inventory due to which the net income would be less.

2. The cost of goods sold would be determined by having a comparision of total revenues generated and total expenses incurred as Q-mart understated the inventory so the balance sheet would reflect the high amount of cost of goods sold