Question

How would each of the following inventory errors affect net income for the​ year? Assume each is the only error during the year.

1. Ending inventory is overstated by​ $3,000.

2. Ending inventory is understated by​ $1,500.

3. Beginning inventory is understated by​ $3,000.

4. Beginning inventory is overstated by​ $1,550.

1. Net income is overstated or understated?

2. by what amount?

Answer 1

Answer:

Cost of goods sold = Opening Inventory + Purchases - Closing Inventory

Net Income = Revenue - Cost of goods Sold - Expense

Situation 1:

1. When Ending inventory is overstated by $3,000 the cost of goods sold will be understated. Then the net income will be overstated.

2. The amount of Net income Overstated by $3,000.

Situation 2:

1. When Ending inventory is understated by $1,500 the cost of goods sold will be Overstated. Then the net income will be Understated.

2. The amount of Net income Understated by $1,500.

Situation 3:

1. When Beginning inventory is understated by $3,000 the cost of goods sold will be Understated. Then the net income will be Overstated.

2. The amount of Net income Overstated by $3,000.

Situation 4:

1. When Beginning inventory is overstated by $1,550 the cost of goods sold will be Overstated. Then the net income will be Understated.

2. The amount of Net income Understated by $1,550.