Question

An error understated Power Corporation​'s December​ 31, 2018​, ending inventory by​ $54,000. What effect will this error have on total assets and net income for 2018​?

Answer 1

•The total Assets will be under stated by $54,000 in 2018.

•The Net income will also be understated by $54,000 in 2018.

Step-by-step explanation:

In computing income statement, beginning inventory is usually added to net purchases, then minus ending inventory to arrive at cost of goods sold.

The cost of goods sold can also be computed as ;

Cost of goods sold = Beginning inventory + Net purchases - Ending inventory. What the above means is that if ending inventory is understated, then the cost of goods sold will be overstated.

The gross profit is arrived at by deducting cost of goods sold from net sales. So, if cost of goods sold is overstated, then the gross profit will be understated by same amount, whereas an overstated gross profit , will also over state net profit.

Inventory is an asset. When an inventory is understated, then the overall asset would also be understated by same amount.