A firm counting its inventory did not count a box with a value of $1000 in...
A firm counting its inventory did not count a box with a value of $1000 in year 1. In year 2, the firm forgot to count the same box with a value of $1000. State whether it is understated, over stated , or has no effect.
How did this affect retained earnings in year 1?
How did this affect net income in year 2 ?
How did this affect retained earnings in year 2 ?
Homework Answers
As the ending inventory is understated in Year 1 the net income and retained earnings are also understated.
How did this affect retained earnings in year 1? Understated by $1,000
As the ending inventory is understated in Year 2 the net income and retained earnings are also understated. As the beginning inventory is understated in Year 2 the net income and retained earnings are also overstated. As the both amounts are $1,000 there will be no net effect on net income and retained earnings.
How did this affect net income in year 2 ? No effect
How did this affect retained earnings in year 2 ? No effect
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