Question

Marshall company discovers in 2014 that its ending inventory at December 31, 2013 was $5000 overstated. What effect will this error have on (a) 2013 net income,(b) 2014 net income, (c) the combines net income for two years?

Answer 1

Whenever the closing inventory is overstated than it means that at the end of the closing stock is more and so the gross revenue will also more. than in this case in the year of overstated of closing stock income will be more and in the next year opening stock will be more so in the next year income will be less and if we combined the net income for two years than there is no impact.

So as per the above,

a) Net income of the year 2013 is overstated with $ 5,000

b) Net income of the year 2014 is understaed with $ 5,000

c) Combines net income for two years will no effect on the net income becasue in th year 2013 income is overstated and in the year of 2014 income is uderstated.

Example:

Formate of Gross Revenue :Sales - Cost of Goods Sol

Cost of Goods Sold = Opening Stock + Purchases During the year - Closing Stock

So in the cost of goods sold we deduct the Closing stock and add the opening stck. So Closing stock overstated lead to increase the revenue and opening stock increase effect to decrease the revenue.