Question

Determining how Assets, Liabilities, Shareholders Equity, Revenue, Expense, and Net Income are understated, overstated, or not affected by a company's action.

Example:

1. A company did not record a sale made on account for services that have been provided.

2. The amount of cash a customer paid for a sale previously made on credit was understated.

3. The value of inventory purchased on account was understated.

4. Our company recently purchased inventory. The purchase of the inventory was recorded correctly; however, the cost of shipping the inventory was not recorded. The company paid cash for the shipping expense.

I would appreciate if you could teach me how to do this. Thank you!

Answer 1

1. Understated of revenue which result in to understated Net income because the sale is the income for the company and if you are not booking the income it will decrease your revenue as well as net income.

2. Overstated assets by company because company has received a cash for the sale made on credit which means not passing cash receiving for credit sale will increase account receivable which will make overstatement of the assets of the company.

3.The under statement of value of inventory will have effect of understatement of expenses and current assets of the company will understate the net income of the company because lower the closing inventory value the profit also come down.

4. the non recording of Cost of shipping will increase the net income and decrease the expenses. and same was paid by cash so non recording of the same will overstatement of the assets of the company.

Simple logic to be followed the effect of the same on Income statement and balance sheet of the company.