Question

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year?

Answer 1

Answer:

$2000 understatement of net income

$2000 overstatement of costs of goods sold

Explanation:

In the production process raw materials are inputted in the process, these are converted to work in process, and finally to finished goods.

The finished goods are now sold to the customer.

Since the amount of inventory was understated the balance must be moved from finished goods inventory to finished goods inventory.

The income earned will be understated because inventory will be short of $2,000 and also income will be short by this amount.

Cost of goods sold will be overstated with $2,000 because cost will be allocated to fewer goods, therefore it will be higher per item.