Final answer:
Almond Supplies Company's undercount of inventory would result in an understated balance sheet by $9,000 and an overstated cost of goods sold. This leads to a lower net income, affecting both the income statement and the equity section of the balance sheet.
Step-by-step explanation:
The company counted its inventory as $545,000 when the correct amount was $554,000. This means there was an undercounting of $9,000. As inventory is an asset, this miscount would result in the assets on the balance sheet being understated by $9,000. Furthermore, because the ending inventory is understated, the cost of goods sold (COGS) would be overstated on the income statement, assuming the company uses a periodic inventory system. This overstatement in COGS leads to lower gross profit and thus lower net income.
To understand the effects on the financial statements, consider that within the accounting equation (Assets = Liabilities + Equity), inventory affects assets and equity (via retained earnings as net income is part of retained earnings). If ending inventory is underreported, assets decrease, and because net income is also decreased from the overstatement of COGS, equity decreases as well. This misstatement does not affect liabilities.
For example, if a company's cost of goods sold was previously $100,000, with the underreported inventory, COGS would mistakenly be reported as $109,000, resulting in net income being $9,000 less than it should be. Given this misstatement, Almond Supplies Company would show a lower net income and therefore lower retained earnings. This reduces the equity section of the balance sheet, thus affecting both the balance sheet and income statement due to the inventory miscount.