A company had an ending inventory that was overstated by $5,00...

Question

A company had an ending inventory that was overstated by $5,000 due to a miscount during the year-end inventory count. The amounts reflected in the end of the period balance sheet are:

Table showing the effects of inventory errors on assets and equity in financial accounting.

Accepted Answer

Alright. Let's try this practice. A company had an ending inventory that was overstated by 5,000. Alright. Ending inventory overstated by 5,000 due to a miscount during the year end inventory count. The out amounts reflected in the end of period balance sheet are. So we're gonna see if assets are overstated or understated and equity being overstated or understated or correct. Okay. So the first thing we wanna think about is it's pretty clear that our assets are gonna be overstated. Right? Because it told us that the company had ending inventory that was overstated by 5,000. So we know that the ending inventory is overstated. That's an asset. So the assets are overstated. Okay? So we know these aren't gonna be correct here. Now we have to think about equity. The equity accounts, remember, this includes, income. Right? Income is included in equity. That's part of our equity. So what's gonna happen because of this error is it's gonna affect our cost of goods sold. If we overstate so if ending inventory is overstated, that means that COGS was understated. Right. Because this goes back to that idea of goods available for sale. If we start with our beginning balance in inventory and add to it the purchases during the period, those were our goods available for sale. Right? Oops. Available for sale. So So when we think about that, the beginning inventory in the purchases, that's everything we have available for sale. It's either gonna end up in ending inventory or it's gonna end up in cost of goods sold, right? If we sell it, it goes to cost of goods sold. If we didn't sell it, it's an ending inventory, okay? So if we say there's more in ending inventory than there should be, that means we're saying there's less in cost of goods sold. Right? We took some from the cost of goods sold bucket and that's gonna be understated. So if cost of goods sold is understated, this is where it's gonna be a little tricky. If cost of goods sold is understated, we got to think about income. Right? We're gonna have revenue minus cost of goods sold, right, gives us gross profit. So think about what's happening here. Our cost of goods sold was understated. Right? We said there was less than there actually was. So we said there was less expense than there actually was. So that means if we said there was less expense that means we took more income. Right? We said there was a higher income because we understated the expense. So if we so that means we overstated our income which means we're gonna overstate our equity. So in this case, we overstated our assets and overstated our equity. Right? Because whenever we say we made more income, right, that's gonna increase our equity. So in this case, we increased it too much because COGS was too low. Alright? So it's a little tricky, right? There's a lot of like kind of following the logic and seeing what happens, but you just gotta think of it on that high level like that. Alright? Let's go ahead and move on to the next question.

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A company had an ending inventory that was overstated by \$5,000 due to a miscount during the year-end inventory count. The amounts reflected in the end of the period balance sheet are:

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