Question

Moonland Company's income statement contained the following errors:

Answer 1

Answer:

Both errors will result in an understatement of net income before taxes by $12,000 and $1,800 respectively. Hence when combined, net income will be understated by $13,800.

Explanation:

The movement in inventory account is given by the relationship;

Opening balance + purchases/production - cost of goods sold  = closing inventory

Hence an understatement of the closing balance by $12,000 would result in an overstatement of the cost of goods sold by the same amount. This in turn will result in an understatement of net income by the same amount.

The overstatement of an expense results in an understatement of net income.

Hence the overstatement of depreciation by $1,800 would result in the understatement of net income by the same amount.