Question

If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line? a.Net income will be understated. b.Only gross profit will be affected. c.There will be no change to net income. d.Net income will be overstated.

Answer 1

If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line d.Net income will be overstated.

Explanation:

The Formula for net income is total expense subtracted by total revenues.The total expense can be further sub categorized into cost of goods sold, operating expenses, interest, and taxes.

To calculate the net  income, the cost of goods sold is subtracted from the revenue. In case the  cost of goods sold is very  low compared to what it actually should be , it makes the net income appear larger than it actually is. it results in an increases in the tax liability for the company.

hence we can say that ,If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line d.Net income will be overstated.