Question

Pettit Company reports net income of $90,000 in 2019. However, ending inven- tory was understated $7,000. What is the correct net income for 2019? What effect, if any, will this error have on total assets as reported in the balance sheet at December 31, 2019?

Answer 1

Answer:

a)Corrected net income= $97,000

b) Total assets figure is understated.

Explanation:

To arrive at the net income, cost of goods sold is usually deducted from the sales revenue. An cost of sold is determined by subtracting the value of inventory. So an understated inventory would mean an overstated cost of goods sold and understated net income

Correct net income = 90,000 + 7,000

                                = $97,000

Inventory is part of current assets s reported in the balance sheet . Therefore, if inventory is understated it implies that the current assets figure is understated and therefore the total assets figure is understated.