Discussion question accounting, 100 word minimum
Companies can determine the effect of ending inventory errors on the balance sheet by using the basic accounting equation: Assets = Liabilities + Owner’s Equity. How would the over or understatement of inventory impact assets, liability and owner’s equity.
The overstating/understating of the inventory has serious ramifications on assets, liability and owner’s equity. One of them is that the ultimate gross profit and the net income will also be understated or overstated because not enough of the available cost of goods is being charged to the cost of goods sold, and vice versa. The higher amount of net income means that the reported amount of retained earnings and stockholders’ equity is also too high. When the COGS is not accurate because of the initial err in inventory, pre-tax income also will be inaccurate. In turn, the income tax expense will either reduce or be inflated because the initial income on which the tax is calculation is made.
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