Question

During the taking of its physical inventory on December 31, 2013, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. Indicate the effect of the misstatement on Waterjet Bath's December 31, 2013, balance sheet and income statement for the year ended December 31, 2013. Also record the amount of each overstatement or understatement. Enter all amounts as positive numbers.

Answer 1

Answer and Explanation:

Since in the question it is mentioned that

Incorrectly amount recorded = $728,660

And, the corrected amount is = $719,880

The difference is

= $728,660 - $719,880

= $8,780

Based on the misstatement, the effect on the financial statement is

For Balance sheet:

Overstatement of Merchandise inventory = $8,780

Overstatement of Current assets = $8,780

Overstatement of Total assets = $8,780

Overstatement of Owner equity = $8,780

For Income statement:

Understatement of Cost of merchandise sold = $8,780

Overstatement of Gross profit = $8,780

Overstated of Net income = $8,780