In: Accounting
During the taking of its physical inventory on December 31, 20Y3, Kate's Interiors Company incorrectly counted its inventory as $123,800 instead of the correct amount of $132,465. Indicate the effect of the misstatement on Kate's Interiors'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.
Cost of goods sold | |||
Current assets | |||
Gross profit | |||
Inventory | |||
Net income | |||
Stockholders' equity | |||
Total assets |
Balance Sheet Items
Item | overstated/understated | Amount of misstatement |
Inventory | understated | $8,665 |
Current assets | understated | $8,665 |
Total assets | understated | $8,665 |
Stockholder's equity | understated | $8,665 |
Income statement Items
Item | overstated/understated | Amount of misstatement |
Cost of goods sold | overstated | $8,665 |
Gross profit | understated | $8,665 |
Net Income | understated | $8,665 |
Explanation:
Over/under stated amount = Correct value of inventory - incorrect value of inventory = $132,465 - $123,800 = $8,665
Since, inventory is an asset and the value recorded is less than the actual, therefore, it is understated. Also, Inventory is a part of current assets and total assets, therefore, they shall also be understated. Now, in the Income statement the ending inventory is deducted to know the cost of goods sold from sales, now since, it is understated, therefore, less will be deducted meaning the cost of goods sold shall be overstated and this will in turn reduce the gross profit and Net income i.e. they shall be understated. Lastly, stockholder's equity shall be understated because the net income after dividens are added to the stockholder's equity as retained earnings and since, less will be added, thereby understating the stockholder's equity.