lo 5 sports inc. understated 2021 ending inventory by $20,000. what effect, if any, will this error have on…
lo 5 sports inc. understated 2021 ending inventory by $20,000. what effect, if any, will this error have on sports inc. 2021 net income?
Answer
Explanation:
Step1: Recall cost - of - goods - sold formula
Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - Ending Inventory. When ending inventory is understated, COGS will be overstated.
Step2: Understand net income relationship with COGS
Net Income = Revenues - COGS - Other Expenses. Since COGS is overstated, net income will be understated. The amount of under - statement is equal to the amount of under - statement of ending inventory.
Answer:
2021 net income is understated by $20,000