Question

During the taking of its physical inventory, a company inadvertently counted its inventory as $89,000 instead of the correct amount of $87,000. Indicate the effect of the misstatement on the balance sheet of the current year. a.Owner's equity is understated by $2,000. b.Liabilities are overstated by $2,000. c.Assets are understated by $2,000. d.Owner's equity is overstated by $2,000.

Answer 1

d.Owner's equity is overstated by $2,000.

Step-by-step explanation:

The movement in the balance of inventory at the start and end of a period is as a result of sales and purchases. While sales reduces the balance in inventory, purchases increases the balance. This may be expressed mathematically as

Opening balance + purchases - cost of goods sold = closing balance

As such, when ending inventory is overstated, the cost of goods sold will be understated and net income will be overstated. Assets balance is overstated and so is owner's equity

Difference = $89000 - $87000

= $2000