Question

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $225,513 instead of the correct amount of $170,230. The effect on the balance sheet and income statement would be ________.

Answer 1

Answer:

The inventory would be increased by $55,283 and the profit has been decreased by the same amount.

Explanation:

The reason is that the closing inventory has been increased by the difference of the correct and incorrect amount which is:

Closing inventory difference = $225,513 - $170,230 = $55,283

This will increase the closing inventory in the balance sheet and the increase in the closing inventory will decrease the cost of goods sold. The lower the cost of goods sold the greater is the profit.