explain the effect an error understanding a firm;s ending inventory will have on the current and...

explain the effect an error understanding a firm;s ending inventory will have on the current and the following year's income statement and balance sheet. Explain in detail.

Expert Solution

The effect an error understanding a firms ending inventory will have on current and following years income statement and balance sheet is inf current inventory is overstated due to any reason the profit and loss will be affected.if company understated the closing stock /inventory then cost of goods will be overstated by that amount and also net income and gross profit is also affected l.e understated.such types of mistake affected on current and following financial position of company.

Effects of error in closing inventory.

inventory COGS Gross Profit Net income

overstated understated overstated overstated

understated overstated understated understated

Effects of error in closing stock on financial statement.

If inventory is understated then assets are overstated and there is no impact on liabilities but due to that owners equity also understated and vice versa.

Ending closing inventory automatically become opening stock of following period such inventory error affects computation of cost of goods sold and net profit of company.

ekkarill92 answered 1 year ago

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