(a) What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error. Merchandise inventory was ---Select--- overstated understated by $ . Therefore, Current assets, Total assets, and Total stockholders' equity were ---Select--- overstated understated by $ . (b) What effect will the error have on the items of the income statement for the retailer? The cost of goods sold was ---Select--- overstated understated by $ . Therefore, gross profit and net income were ---Select--- overstated understated by $ . (c) Did this error make the retailer's quarterly results look better or worse than they actually were? The inventory error made the company's quarterly results look ---Select--- better worse than they actually were.
(a) What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error. Merchandise inventory was ---Select--- overstated understated by $ . Therefore, Current assets, Total assets, and Total stockholders' equity were ---Select--- overstated understated by $ . (b) What effect will the error have on the items of the income statement for the retailer? The cost of goods sold was ---Select--- overstated understated by $ . Therefore, gross profit and net income were ---Select--- overstated understated by $ . (c) Did this error make the retailer's quarterly results look better or worse than they actually were? The inventory error made the company's quarterly results look ---Select--- better worse than they actually were.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
You own a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as $210,000 instead of the correct amount of $120,000. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation.
(a)
What effect did the error have on the items of the balance sheet for the retailer? Express your answer as overstated or understated for the items affected by the error.
Merchandise inventory was ---Select--- overstated understated by $ . Therefore, Current assets, Total assets, and Total stockholders' equity were ---Select--- overstated understated by $ .
(b)
What effect will the error have on the items of the income statement for the retailer?
The cost of goods sold was ---Select--- overstated understated by $ . Therefore, gross profit and net income were ---Select--- overstated understated by $ .
(c)
Did this error make the retailer's quarterly results look better or worse than they actually were?
The inventory error made the company's quarterly results look ---Select--- better worse than they actually were.
Expert Solution
Step 1 Equation and Explanation
One of the Most important Accounting Equation is below
Assets = Liabilities + Stockholders Equity
Inventory is a Part of the Current Assets
So in the Question given, If the Inventory is Reported More Value than what actually it is which means it is Overstated in the Balance Sheet.
Now Looking at the equation, If the Assets is Overstated and Liabilities being same , Stockholders Equity is Overstated also.
Any Net income/Loss has Direct relationship with the Stockholders Equity because while closing a Book for any period, those balances of Net Income/Loss are moved to the Stockholders Equity. So if Stockholders Equity is Overstated which Means Net Income is Overstated.
The Net Income can Increase if Cost of Goods Sold is Understated. In other Words the sales Amount in the Financial Statements are now shown with Higher Gross Margin which is not the Fact.
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