When taking a physical inventory, the company inadvertently counted its inventory as $34,000 instead of the correct amount of $43,000. Indicate the effect of the misstatement on the balance sheet of the current year.

Question

12-03-2020
Business

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When taking a physical inventory, the company inadvertently counted its inventory as $34,000 instead of the correct amount of $43,000. Indicate the effect of the misstatement on the balance sheet of the current year.

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ladeitan ladeitan · Answer 1 · 2020-03-16T02:39:03+01:00

Answer: The current asset of the company is understated by $9,000.

Explanation: Inventory reports under current assets in the balance sheet (statement of financial position). If the inventory is misstated (understated), it means the company's total assets would be less than expected, since there is a decrease in current asset. This would subsequently affect the cash flows and lead to difficulty in reconciling the physical inventory to expected turnover, this may also lead to theft since it is currently understated in the books.