Question

Consultants notified management of Goo Goo Baby Products that a crib toy poses a potential health hazard. Counsel indicates that a product recall is probable and is estimated to cost the company $4.8 million. How will this affect the company's income statement and balance sheet this period?

Answer 1

Answer:

Income statement will have an increased expense of $4.8 million and Revenue and cost of goods sold will decrease. In balance sheet the inventory will be decreased by the amount of crib toy inventory available.

Explanation:

Income Statement will show an expense of $4.8 million in this period as the cost of recall of inventory due to health hazard. Also sales and cost of goods sold will decrease by the amount of sales of crib toy in sales and by the amount of crib toys cost in cost of goods sold and will ultimately result in decrease in a gross profit of a company.

In the Balance Sheet the amount of Inventory will be decreased by the amount of crib toys available in stock.