Question

Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting some inventory items, resulting in an inventory understatement by $610,000. Assume that Berkshire has a 30% income tax rate and that this was the only error it made. If undetected, what is the effect of this error on Berkshire's December 31,2017 balance sheet

Answer 1

Since the inventory was understated, that means that the cost of goods sold was overstated. Since the COGS was higher, gross profits and operating income were lower. This results in lower than income taxes, and lower net income.

Lower net income results in understated retained earnings (by $427,000), also taxes payable, a liability, will also be understated by $183,000. On the other side of the balance sheet, assets ill be understated by $610,000.

Step-by-step explanation: