PE 7-7A Effect of inventory errors

During the taking of its physical inventory on December 31, 2014, Sport Interiors Company incorrectly counted its inventory as $113,900 instead of the correct amount of $118,350. Indicate the effect of the misstatement on Sport Interiors’ December 31, 2014, balance sheet and income statement for the year ended December 31, 2014.


Answer:

Balance Sheet:
Merchandise inventory understated*…………………
Current assets understated………………………………
Total assets understated………………………………
Owner’s equity understated……………………………
Income Statement:
Cost of merchandise sold overstated…………………
Gross profit understated………………………………
Net income understated…………………………………
* $118,350 – $113,900 = $4,450
Amount of Misstatement
Overstatement (Understatement)
$(4,450)
(4,450)
(4,450)
(4,450)
$ 4,450
 (4,450)
 (4,450)