PE 7-7B Effect of inventory errors

During the taking of its physical inventory on December 31, 2014, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. Indicate the effect of the misstatement on Waterjet Bath’s December 31, 2014, balance sheet and income statement for the year ended December 31, 2014.


Answer:

Balance Sheet:
Merchandise inventory overstated*……………………
Current assets overstated………………………………
Total assets overstated…………………………………
Owner’s equity overstated………………………………
Income Statement:
Cost of merchandise sold understated………………
Gross profit overstated……………………………………
Net income overstated…………………………………
* $728,660 – $719,880 = $8,780
Amount of Misstatement
Overstatement (Understatement)
$8,780
8,780
8,780
8,780
$(8,780)
8,780
8,780