Answer:
Understated net income by $10,000
Explanation:
Since closing stock of goods are added in general equation, of sales, that is in T shape account it is credited along with sales revenue, and that the closing stock increases the revenue.
In the given case closing stock is understated by $10,000.
Accordingly, Gross profit is also understated by $10,000.
For this the equation is:
Gross Profit = Sales - Cost of goods sold
Cost of goods sold = Opening Units + Purchases - Closing
Gross Profit = Sales - (Opening Units + Purchases - Closing)
Opening brackets will change the sign for each value
Gross profit = Sales - Opening units - Purchases + Closing units
Thus, Closing units are added and after all deductions, net income is computed and thus, net income is understated in current year by $10,000.
