Question

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $205,171.00 instead of the correct amount of $174,118.00. What would be the effect on the balance sheet and income statement

Answer 1

Correct amount of the inventory = $174,118

Inventory incorrectly recorded = $205,171

The inventory was overstated by = 205,171 - 174,118

=$31,053

As a result of the overstated ending inventory, the net income would be overstated by $31,053 as well.

As a result of the overstated net income, the retained earnings would be overstated by $31,053 as well.

Ending inventory is a part of Assets, thus due to overstated ending inventory, assets would also be overstated by $31,053.