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11 September, 08:24

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

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  1. 11 September, 08:43
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    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.
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