Jeff is the new inventory manager for Alan Company. During the year-end inventory count, Jeff forgets that the company stores additional inventory in a back room, causing his final ending inventory count to be understated. Explain what effect this error will have on the reported amounts for (a) assets, (b) liabilities, (c) stockholders’ equity (or retained earnings), (d) revenues, (e) expenses, and (f) net income in the current year.
Jeff is the new inventory manager for Alan Company. During the year-end inventory count, Jeff forgets that the company stores additional inventory in a back room, causing his final ending inventory count to be understated.
Explain what effect this error will have on the reported amounts for (a) assets, (b) liabilities, (c) stockholders’ equity (or retained earnings), (d) revenues, (e) expenses, and (f) net income in the current year.
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a.
The understatement in the amount of closing inventory would result in an understatement of the assets. It is because the closing inventory is recorded on the asset side of the balance sheet and if the amount of inventory recorded is low as compared to the actual amount of inventory available with the entity then the assets would also be understated.
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