Question

During the taking of its physical inventory, a company inadvertently counted its inventory as $89,000 instead of the correct amount of $87,000. Indicate the effect of the misstatement on the balance sheet of the current year.

Answer 1

Total Assets and Total Equity is overstated.

Step-by-step explanation:

Due to this error the Closing Inventory value in the current asset section of Balance sheet is overstated. As it is also used for cost of goods sold calculation, the cost of goods sold will be understated by $2,000 and the net profit and ultimately retained earning in the equity section of the balance sheet will is increase. So this misstatement overstated the total assets and the Total equity value on the balance sheet

Answer 2

Deviation would lead to excessive assets of $ 2,000 and also the excessive shareholders' equity for the same amount.

Step-by-step explanation:

Given:

• Counted inventory value: $89,000
• Accurate inventory value: $87,000

So there is a unbalance between Counted and Accurate inventory, because Accurate inventory is smaller than Counted inventory so it will create the overstatement with the amount:

= $89,000- $87,000

= $2000.

So, COGS will be underestimated and this will result in excess of net income (and by extension, the equity).

Deviation would lead to excessive assets of $ 2,000 and also the excessive shareholders' equity for the same amount.