Question

Effect of Inventory Errors 

During the taking of its physical inventory on December 31, 20Y3, Zula Company incorrectly counted its inventory as $253,090 instead of the correct amount of $283,460. Indicate the effect of the misstatement on Zula's December 31, 20Y3, balance sheet or income statement for the year ended December 31, 20Y3. For each select if the amount is overstated or understated. Then, input the over or under amount, entered as a positive value. 

Answer 1

				Support Explanation
Cost of Goods Sold	Overstated		$30,370	Out of cost of goods available for sale, the ending inventory is deducted to know the cost of goods sold so when the ending inventory is deducted less by $253,090 instead of $283,460, the cost of goods sold is overstated by $30,370 ($283,460 - $253,090).
Current Assets		Understated	$30,370	The ending inventory is reported under the current assets section of the balance sheet so increase in ending inventory will increase the current assets and decrease in the ending inventory will decrease the current assets. Hence, the current assets is understated by the $30,370.
Gross Profit		Understated	$30,370	Decrease in the ending inventory also decreases the gross profit. In simple terms, the gross profit is understated due to cost of goods sold is overstated as gross profit is calculated by deducting the cost of goods sold from the sales revenue.
Inventory		Understated	$30,370	The ending inventory is reported under the current assets section of the balance sheet so when there is a decrease due to error in the ending inventory, its balance will also decrease.
Net Income		Understated	$30,370	When the gross profit is understated due to decrease in ending inventory, the net profit will also understated.
Stockholders' Equity		Understated	$30,370	When the net income is understated, the stockholders equity will also understated because the net income is transferred to the retained earnings which is a part of stockholders' equity.
Total Assets		Understated	$30,370	When current assets is understated due to understating of ending inventory, the total assets will also understated because current assets are added to the total assets.
$283,460 - $253,090 = $30,370